German savings pledge raises stakes for Gordon Brown

An emergency plan to pump billions of pounds of taxpayers’ cash into Britain’s banks emerged yesterday as the global financial crisis deepened.
In Germany Angela Merkel, the Chancellor, buried any remaining semblance of a unified European response by guaranteeing individuals’ deposits in an effort to avert a crisis of confidence in the nation’s banks.
Mrs Merkel, who with Gordon Brown led calls on European Union members to resist unilateral action on Saturday, guaranteed private savings to help to prevent the collapse of a German bank yesterday.
Early today Denmark also guaranteed all bank deposits as part of a deal with banks to set up a DRK 35 billion (£3.6 billion) liquidation fund.
The latest moves put further pressure on Mr Brown to follow suit after the Irish Republic and Greece offered similar assurances last week. The Treasury insisted that there was no change in the British scheme, which underwrites deposits up to £50,000.
However, Alistair Darling hinted yesterday that the Government could use public funds to take stakes in many if not all of Britain’s banks to help to restore the system. The Chancellor, who will make a Commons statement on the banking crisis today, said that the Treasury would do “whatever it takes” to help out banks in the short and medium term.
Although Treasury officials insisted that Mr Darling’s statement would not contain any specific proposals, they confirmed that contingency measures were under discussion. “I want to make it clear that we will do whatever it takes not only to stabilise the system but to help going forward, and that means perhaps some pretty big steps that we wouldn’t take in ordinary times,” Mr Darling said.
The German deposit guarantee came as financiers and politicians secured a last-ditch €50 billion rescue of Hypo Real Estate, one of the country’s largest lenders.
In Iceland, bank chief executives met government officials and economists to hammer out a rescue plan for the country’s overstretched commercial banks. Last week the Icelandic Government nationalised Glitnir, its third-biggest bank.
The worsening financial crisis will increase pressure on the Bank of England to cut the UK’s base interest rate from 5 per cent when the central bank’s Monetary Policy Committee meets on Thursday.
David Cameron dropped Conservative opposition to further public ownership as a political consensus began to emerge on the need to require banks to raise more capital.
Mr Cameron said yesterday that the time had come to be frank about the possible need for more taxpayer exposure to Britain’s banks. “A recapitalisation of the banking system may be necessary,” said the Tory leader, adding that the current “piece-meal, ad hoc approach” may now need to be replaced with “something more substantial”. Mr Cameron, in the Financial Times, wrote: “It is possible to imagine the circumstances in which government injections of capital, with proper safeguards and strict conditions, may be the best way to safe-guard the long-term interests of the taxpayer.”
George Osborne, the Shadow Chancellor, also signalled a change in thinking, saying that the Government, alongside creditors and shareholders, should be prepared to invest in cash-starved banks.
Mr Darling was asked yesterday if he had a list of banks that may be in trouble, but he declined to name any. He said that the Treasury was constantly monitoring the situation, not just in Britain but around the world.
Britain’s banks are likely to fight any attempt to semi-nationalise the banking sector. Forced recapitalisations could involve the Government buying newly issued shares in the banks, taking a minority stake in the companies. Such a move would be hugely unpopular with existing shareholders, who would see their own investments devalued as a result of the government buy-in.
Britain’s banks insist that they have enough cash to cope with a worsening economy. In the past six months, they have raised more than £20 billion from shareholders to bolster their balance sheets. This cash is used to protect them against rising bad debts.
The banks argue that their real problem is liquidity. The market in which banks lend to each other at wholesale prices has dried up as banks hoard their cash in case economic problems worsen. Because they cannot borrow as much as usual in the wholesale market, banks have had to cut back on lending to customers. They insisted yesterday that recent moves by the Bank of England appeared to be sufficient to loosen up the wholesale market, meaning that more funds would be made available to retail borrowers.
Writing in The Times today Andrew Tyrie, a Conservative MP and former Treasury adviser, said that forcing all banks to re-capitalise would solve the liquidity problem more quickly than could be achieved by the Bank of England’s cash injections. “The suspicion is growing that the fundamental cause of the freeze-up of the interbank market is not just temporary concerns about liquidity but deeper worries about the solvency of some of the banks,” he writes.
A banking Bill to make full rescues like that of Northern Rock and Bradord & Bingley easier will be introduced in Parliament tomorrow.