Berlin pulls out stops to reassure savers, investors

BERLIN: The German government raced on Monday to reassure investors and individual savers it will protect Europe's biggest economy from falling victim to the global financial crisis.

The stock exchange may not have got the message however as shares tumbled seven percent Monday in line with heavy losses around the world.

Rumours circulated, meanwhile, that the German government was getting set to unveil a huge guarantee for the country's entire banking sector.

Berlin hoped a new 50-billion-euro (68-billion-dollar) rescue plan for the distressed mortgage lender Hypo Real Estate (HRE) and a blanket guarantee on private bank accounts would prevent panic from seizing a nation of savers.
Finance minister Peer Steinbrueck said he did not rule out raising state guarantees on HRE credit lines and that there was "a plan B in the drawer" to ensure the banking sector did not collapse.

Steinbrueck did not provide details but told a press conference: "We are aware that we will not get very far with case-by-case solutions." HRE is now to be provided with credit lines worth a total 50 billion euros, of which a little more than half was to be guaranteed by the state.

Shares in the bank were hammered on the Frankfurt stock exchange however, losing 37.42 percent to 4.70 euros.
The Dax index of blue-chip stocks gave up a massive 7.07 percent to 5,387.01 points. Berlin said it would guarantee private bank accounts, which contain more than one trillion euros, although the amount the government would have to guarantee directly could be much less than that.

Savers are already guaranteed up to a maximum of 20,000 euros per account "so the extra liability that the government has taken on is nowhere near as large" as figures quoted in the media, Capital Economics economist Jennifer McKeown said.

Economics professor Hans-Peter Burghof of the University of Hohenheim told German radio however that the amount still represented "the biggest guarantee in history.

"Never has anyone anywhere in the world guaranteed such a sum in two simple sentences," he said, while noting that in principle the idea of giving guarantees was to ensure they would not be needed.
Chancellor Angela Merkel told reporters on Sunday that the government "will not allow an institution's crisis to become a crisis for the entire system."

A day later, finance ministry spokesman Torsten Albig the media: "Since they were unable to correct themselves, financial markets looked to the German government" for help.

"The DAX is now looking for a general plan for the banks, maybe as early as Wednesday," he added. In Brussels, the European Commission said the German decision regarding private accounts appeared to conform to EU competition rules and did not pose the same problems as a similar announcement by Ireland.

"The commission notes that the measures seem to be limited to retail bank deposits, so (they are) less liable to give rise to distortion of competition," said commission spokesman Jonathan Todd. An initial guarantee issued by the Irish government to banks has drawn criticism from several European Union countries, including Germany, which feared it could distort competition by making Irish bank accounts more attractive to EU savers.

Meanwhile, McKeown warned that "although the measures should help to gradually restore confidence in banks, they could clearly do some serious damage to government finances." She added that "the economy might soon be recording significant fiscal deficits after achieving a balanced budget last year."