European governments in race to save their banks

Germany surprises its partners by guaranteeing deposits in its banks.

Several European Union-member governments are now caught in a race to the bottom to save their banks instead of working on a collective fund- amid another meltdown in the European indexes today.

BNP, a leading French bank, announced today it will take control of Fortis operations in Belgium and Luxembourg as well as company’s international banking franchise in a deal valued at $19.7 billion.

The German government announced a rescue package of $68 billion for Hypo Real Estate, Germany’s second bigger commercial property lender after an earlier bailout faltered.

After the financial contagion spread rapidly to European banks with the forced announcement of rescue packages for Fortis in Belgium and Hypo Real Estate in Germany, the German chancellor Angela Merkel took the unusual step on Sunday to provide guarantee to all private savings accounts in German banks.

“We are saying to savers that their deposits are secure,” Merkel said, while her financial minister Peer Steinbruck insisted that “I’d like to stress that we will make sure that no German saver should fear losing a euro of their deposits.”

As politician resorted to the bail-out route instead of creating a collective rescue fund, a la the $ 700 billion package by the US Congress, the chances are that it would soon degenerate into a race to the bottom among countries, analysts argued.

Though the leaders of the Europe’s big four- Germany, France, Italy and Britain- agreed on an emergency global summit and a collective response to face the financial crisis during the weekend, Germany surprised its partners after the meeting by taking the extraordinary step of guaranteeing all the deposits in its banks.

Last week, the Irish government declared it will protect money held in savings account in six banks. Subsequently, Greece, Denmark and Austria followed the suit by guaranteeing their depositors’ savings.

In a sharp rebuke, the EU’s top four, including Germany, denounced Ireland for taking unilateral steps. The EU also hit back at Greece insisting that Athens must withdraw its move to provide limitless guarantees for its depositors.

The four supported French President Nicolas Sarkozy’s call for a global summit to draw up a new international financial system to replace the existing Bretton Woods that was created in 1944. “We are laying the foundations of entrepreneurial capitalism, not speculative capitalism,” the French President insisted.

With Germany having retracted on a collective response now by choosing to commit the same mistake as Ireland, Greece, Denmark, and Austria, a race to the bottom is now started, analysts said.

Britain, which guarantees savings of £ 50,000, is now worried about the consequences of the German move as its citizens would be tempted to move to Irish or German banks that have branches in Britain.