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European banks get needed help

October 01, 2008|Tom Petruno | Times Staff Writer

After Congress voted down the administration's financial-system rescue plan Monday, European governments were busy Tuesday committing more public funds to save their own banks.

The biggest surprise: The Irish government guaranteed all deposits and debts of the country's major banks, one day after the Irish stock market plummeted 13%, nearly twice the decline of the Dow Jones industrials.

"We have to create confidence," Finance Minister Brian Lenihan said on RTE Radio. "We can't bail out a particular bank. That wouldn't be right. What we have decided to do is give a general guarantee that the banks can lend in security and safety."

Banks worldwide have cut off lending to one another as the credit crisis has deepened. Ireland's guarantee may give its banks a better chance of getting funding in money markets.

Separately, the French-Belgian bank Dexia got a commitment Tuesday for a $9.2-billion capital infusion from Belgium, France and Luxembourg. That followed the $16.3-billion bailout of the Dutch-Belgian financial services giant Fortis by Belgium, the Netherlands and Luxembourg on Sunday.

On Monday, the British government nationalized mortgage lender Bradford & Bingley, and Iceland's government took control of the country's third-largest bank, Glitnir.

In Ireland, the government's total guarantee of bank deposits supersedes the old guarantee of 100,000 euros (about $140,000).

Ireland's economy is in a particularly bad situation. It's now officially in recession, is burdened by high debt levels and is running a large trade deficit, according to the Financial Times.

The government's guarantee of all bank deposits and debts covers about $560 billion in liabilities -- double the country's gross domestic product. Lenihan said banks would pay fees for the guarantee but didn't give specifics.

One argument against any such blanket guarantee is that when you insure everything, you insure nothing. But for the moment, Irish investors are happy about the move: The main Irish stock index rebounded 7.9% today after Monday's dive.

The European bank bailouts aren't helping the euro, however. The currency has plunged to $1.406 from $1.447 on Monday and is nearing the 52-week low of $1.399 reached Sept. 11.

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tom.petruno@latimes.com

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