German saver guarantee to be "political"

Business Materials 6 October 2008 22:13 (UTC +04:00)

Germany's guarantee that an estimated 1 trillion euros (1.4 trillion dollars) in personal savings at banks are safe is a long-term "political" assurance, a spokesman for Chancellor Angela Merkel said Monday, dpa reported.

The pledge, issued Sunday to calm the public, will not take legislative form, officials said.

Government spokesman Ulrich Wilhelm said the assurance applied to both Germans' and foreigners' personal deposits at German banks, but not to deposits by incorporated companies. Nor does it guarantee the banks themselves.

The future of property lender Hypo Real Estate (HRE) remained uncertain. Shares in HRE plunged 36 per cent in Frankfurt Stock Exchange trading, despite the announcement of a 50-billion-euro bail-out for the German company.

Other banks and the federal government pressed HRE on Monday to sack its chief executive.

European Union finance ministers in Luxembourg said Monday they would follow Berlin's guarantee to savers and pointed out that no European depositor had lost their savings so far in the crisis.

The Merkel guarantee was issued in the form of two sentences for the television cameras on Sunday.

"We are saying to women and men savers that their deposits are safe. The federal government promises that," Merkel said. Officials said they were still talking to banks on how to precisely shape the guarantee.

Wilhelm said in Berlin, "It's a political statement that can be relied on and is decisive." The German government and its capabilities stood behind this assurance, he added.

The guarantee covers current accounts, term deposits and savings accounts, which make up less than a quarter of German household's financial assets.

The Bundesbank said Germans own bank accounts, bonds and stocks worth 4.56 trillion euros in total, with cash in hand and bank deposits comprising 1.62 trillion euros.

Jonathan Todd, spokesman for European Competition Commissioner Neelie Kroes, said: "We were informed by the German authorities of their intentions.

"The commission notes that the measures seem to be limited to retail bank deposits, and so less liable to give rise to distortions of competition."

Todd added, "In general, retail deposit guarantee schemes for savers can be an appropriate policy response to fears regarding the stability of the banking system."

The crisis reached Germany with the stumble by Hypo Real Estate (HRE), a Munich-based company that lends to commercial developers and municipalities to build hotels, offices, roads, airports and the like.

Germany was embarrassed when a 35-billion-euro bail-out a week ago proved inadequate. On Sunday a new, 50-billion-euro rescue was announced but industry sources said it had not yet been signed by banks and the government on Monday.

A sticking point appeared to be demands that HRE chief executive Georg Funke resign. HRE declined comment.

The other banks were reportedly angry that they were not told a week ago that HRE's problems were so grave.

German Finance Minister Peer Steinbrueck said it was "unthinkable" to keep dealing with the same HRE top management.

He charged that HRE, at the same time as seeking state aid, had used lawyers against the government so as to "escape its responsibilities."

In Monday trading, HRE stock declined as much as 40 per cent from Friday's close as investors worried that the new bail-out might also prove inadequate.

In Brussels, the EU Commission's Todd, said, "As soon as the details are notified to us we will assess very quickly whether the new measures are compatible with (the EU's) state aid rules."

A newspaper, Die Welt, was to appear Tuesday with a report that HRE was blaming its plunge from grace on a downgrading by ratings agencies that allowed creditors to call up loans.

Berlin has refused demands by the banking industry to nationalize HRE, a lender seen in Germany as too important to let fail because of its association with a two-century-old form of German bond, the pfandbrief.

Hendrik Kollmann of Bearing Point, a corporate advisor, explained, "In more than 230 years of the pfandbrief, there has never been one default."

Steinbrueck said financial securities that have been disdained in the past by central banks would be used as security for much of the 15-billion-euro expansion of the HRE bail-out.

The European Central Bank (ECB) had agreed to this, he said.

"Nobody can forecast just yet how much this paper is actually worth," he added.

The government and banking-industry guarantee that backstops the new bail-out remains limited to 35 billion euros, as announced one week ago.