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European banks struggle to limit turmoil

October 06, 2008|Tom Petruno | Times Staff Writer

As the $700-billion U.S. financial system bailout gets underway, Europe is struggling to contain its own banking turmoil.

After European leaders failed to agree Saturday on a comprehensive plan to deal with rising bad loans and crumbling banks, German Chancellor Angela Merkel said Sunday that the government would guarantee all personal bank deposits -- a bid to prevent a meltdown of consumer confidence.

"We want to tell savers that their deposits are safe," Merkel told reporters in Berlin, according to Bloomberg News. "The government will vouch for that."

Later Sunday, the German government and the country's major banks and insurers agreed on a new, $68-billion plan to rescue Hypo Real Estate Holding, the nation's second-biggest property lender, Bloomberg reported. An earlier rescue plan worth $49 billion had collapsed after banks pulled their support.

Also Sunday, BNP Paribas, France's biggest bank, agreed to take control of European financial group Fortis' units in Belgium and Luxembourg after a government rescue failed to ensure Fortis' stability.

As in the U.S., banks across Europe have been tripped by rotting mortgage loans and by a virtual shutdown of short-term funding in the credit markets. But the piecemeal plans adopted by individual countries to deal with the crisis in recent weeks have had some presumably unintended consequences.

After the Irish government agreed Tuesday to guarantee all deposits and other liabilities of the country's six major banks, British banks complained that depositors were pulling funds and sending them to Irish banks. On Friday, Britain proposed raising its own deposit insurance limits.

The U.S. bailout plan passed by Congress on Friday also sought to boost protection for bank savers by raising the basic federal deposit insurance limit to $250,000 per account from $100,000.

If the euro is another barometer of confidence, it's pointing to a continuing loss of investor faith in Europe: On Sunday it was trading at $1.364 in Asia, down from $1.377 on Friday, and a 52-week low.

The euro has skidded from $1.477 just two weeks ago. It was near $1.60 in mid-July.

Can a European interest rate cut be far behind?




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