Greece joins stampede for Europe-wide bank bailout

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, October 2, 2008

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3124320...

The Greek government has issued a blanket guarantee of all bank deposits after panic withdrawals by customers in Athens and Thessaloniki, creating an unstoppable stampede across Europe for an EU-wide bail of the financial system.

Greek officials said the state would cover "all bank deposits, whatever the amount." The move follows the dramatic decision by Ireland this week to guarantee the deposits and debts of its six biggest lenders in the most sweeping bank bail-out since the credit crisis began.

"The whole of Europe will have to do same thing. Otherwise Europe will have a split banking system," said Hans Redeker, currency chief at BNP Paribas. British banks are already facing a haemorrhage of deposits to Irish banks that now enjoy the AAA sovereign rating of the Irish state.

Greece has so far escaped attention as the financial storm breaks over Europe, but the economy is deeply unbalanced. A torrid credit boom has been allowed to run unchecked, leading to a current account deficit of 15pc of GDP -- the highest in the eurozone.

While property losses are modest so far, the Greek banks have run into trouble rolling over short-term debts after the near total closure of Europe's capital markets. The liabilities of the Greek banks are roughly €320bn euros.

As rumours flew in another day of fast-moving drama in Europe, the credit system continued to flash warning signs of extreme stress. Three-month Euribor - the benchmark rate used for floating mortgages and financial contracts -- rose to a post-EMU record of 5.33pc.

Governments across Eastern Europe were forced to issue statements on Thursday assuring depositors that their banks were safe. Traders said Ukraine is on the brink of a currency crisis.

The Greek move puts fresh pressure on Germany to back the mounting calls for an EU lifeboat fund to shore up Europe's struggling banks, even though such a plans are anathema to Berlin. Chancellor Angela Merkel warned that there would be no "blank cheques" for those who get into trouble.

Berlin fears that any such fund is a Trojan Horse that could ultimately leave German taxpayers footing the bill for a massive bail-out of the southern Europe as the region's booms turn to bust. Key ministers are now frantically trying to stop the idea gaining a serious head of steam.

Finance minister Peer Steinbrueck said German citizens should not have to step in "to stabilize situations for which other countries are responsible. To put it mildly, Germany is highly cautious about such grand designs for Europe. Other countries are free to think about it. I just don't see any German interest in it," he told the Wall Street Journal.

The comments are the clearest indication to date that Berlin will resist moves to create a pan-European treasury to back up the single currency, whatever the risk for the stability of monetary union.

Confusion reigned across Europe as different capitals gave briefings and counter-briefings on the lifeboat plans. French finance minister Christine Lagarde backed away from earlier ideas for a E300 billion rescue fund to help weaker countries cope with financial panics. "There is no such thing," she said

Separately, the Netherlands has mooted a plan for each EU country to pay 3pc of GDP into a reserve fund.

A raft of ideas are to be discussed at an emergency summit of the French, British, German, and Italian leaders in Paris on Saturday, though it looks increasingly unlikely that anything of substance will be agreed.

The squabbling has exposed the deep flaws in the EU's crisis machinery. While the single currency spans fifteen states, each government controls its own fiscal policy and nationalist reflexes die hard.

Neelie Kroes, the EU competition commissioner, said that Ireland's decision to act unilaterally -- disregarding EU state aid rules -- risked a descent into the beggar-thy-neighbour mayhem of the Great Depression.

"When Europe was confronted with a banking crisis in the 1930s, governments decided to go national and close their borders. Protectionism was not the solution at the time, as we very well know. Let us not make the same mistake twice," she said. Brussels has already been overtaken by events.

David Owen, Europe economist at Dresdner Kleinwor, said Ireland had no choice, given the lighting pace of events on Monday. "Their banks were going down. No government can let that happen. They did exactly the right thing to ring fence this."

Angel Gurria, the head of the OECD club of rich nations, said Europe may not have the luxury of trying "piecemeal" responses as the financial storm turns violent. "Considering the exposure of European financial institutions, we might have to start thinking of a systemic plan for Europe if things don't improve on the other side of the Atlantic," he said.

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