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WRAPUP 1-EU eyes hike in bank deposit cover as crisis rages

Tue, Oct 7 2008, 09:01 GMT
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LUXEMBOURG, Oct 7 (Reuters) - EU finance ministers, groping for a confidence-boosting response to a global financial crisis, were debating a sizeable hike on Tuesday in minimum levels of bank deposit insurance across the 27 European Union countries.

Irish Finance Minister Brian Lenihan, in the dog house with some European partners after Dublin unilaterally took radical steps to stabilise Irish banks, said a figure of 100,000 euros ($135,900) was an option, compared to minimum now of 20,000.

"Clearly anything we can do to give greater confidence among depositors is very important," Lenihan told reporters on arrival for the talks in Luxembourg with fellow ministers.

"Certainly anything that can stop the movements between accounts would be very welcome," he said. Some British savers shifted deposits to Irish banks after Dublin issued an unlimited guarantee last week.

In a swipe at such national moves, Swedish Finance Minister Anders Borg said: "We need to find a common solution as one country's solution may be another country's problem."

European governments are struggling to shelter banks and depositors from the financial crisis that snowballed from the United States and is now rattling confidence, pummelling stock markets and paralysing wholesale money markets in Europe.

Central bankers are pumping emergency funding into interbank markets to keep a fear-riven financial system from seizing up and European Central Bank President Jean-Claude Trichet said on Monday night they would continue to do so as long as needed.

"COUNT ON THE ECB"

"You can tell the citizens they can count on the ECB," he told a news conference in a rare appearance after talks with euro zone finance ministers preceding Tuesday's wider meeting.

French central bank governor Christian Noyer joined the fray on Tuesday, saying French banks were fundamentally sound and that there was no reason to expect a stock market collapse despite the huge falls of Monday.

"Everyone must understand that our banks are solid ... and obviously none of them risk going bankrupt or even running into serious difficulty," Noyer told French radio station Europe 1.

"We have no reason to think the stock markets will collapse. There is no reason for that to happen. The companies behind them are companies that are fundamentally solid," Noyer said.

European shares turned sharply negative again on Tuesday having risen more than 2.5 percent in initial trading, as banks took a beating amid reports of additional funding needs.

The discussion of a collective increase in minimum levels of protection for savers follows a general political pledge by EU leaders on Monday that people should not fear for their savings.

"All European Union leaders declare that each of them will take the necessary measures to ensure the stability of the financial system," the 27 leaders said in a statement on Monday read by French President Nicolas Sarkozy, whose country holds the rotating EU presidency.

"No depositor in our countries' banks has suffered any losses and we will continue to take the measures needed to protect the system and depositors," it said.

IRISH IRE

Germany and others are annoyed with the Irish for going it alone with state guarantees for all liabilities of six Irish banks, and doing so via legislation rather than the political commitment that is being made elsewhere so far.

One worry is that the measure discriminates against non-Irish banks and skews EU principles that business must compete on a level playing field.

What sets Ireland's plan apart is that its government not only guaranteed savers' deposits but also banks' wholesale liabilities, meaning an institution lending to an Irish bank on interbank money markets knows the borrower is state-protected.

The difference is critical because the potential cost of effectively underwriting bank-to-bank lending compared with just retail deposits is far higher.

Ireland has guaranteed some 400 billion euros ($550 billion) in total, double its entire annual economic output. Roughly half of the funds guaranteed are retail deposits.

Several countries including Germany, France and Britain made political pledges to savers prior to Monday's EU-wide political commitment, but they stopped way short of offering such blanket assurances to banks and others in the financial business.

An EU-wide minimum deposit insurance level of 100,000 euros would still be less than the $250,000 written into the $700 billion rescue plan the U.S. administration is rushing to implement to stabilise the economy and markets there.

(Writing by Brian Love, with additional reporting by Jamie McGeever in London, Francois Murphy and Tamora Vidaillet in Paris and, in Luxembourg, Marcin Grajewski, Jan Strupczewski, Paul Carrel; editing by Paul Taylor) ($1=.7358 euro) Keywords: FINANCIAL/EU

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