Germany hammers out new rescue plan to save bank

Germany became the latest country to act over the financial meltdown, with a new rescue plan for its second biggest commercial property lender and a 100% guarantee on private bank accounts.

As European governments scrambled to save failing banks, German chancellor Angela Merkel said yesterday that no citizen should fear for the safety of their investments.

Hours later, her government announced a new £38.4bn (€49.6bn) bail-out package for Hypo Real Estate.

Hypo said an original £27bn (€34.9bn) rescue plan fell apart after private lenders withdrew support, a key element to the proposal that had already been approved by the EU.

The deal was on top of the guarantees of private accounts. German finance ministry spokesman Torsten Albig said the unlimited guarantee covered €568bn in savings and checking accounts as well as time deposits, or CDs.

At the same time, Belgian prime minister Yves Leterme said that France’s BNP Paribas bank had committed to taking a 75% stake in troubled Fortis.

Mr Leterme said the Belgian and Luxembourg governments would, in turn, take a blocking minority share in BNP Paribas.

The deal came after two days of closed-door talks between the Paris-based bank, Fortis and government authorities in an effort to restore confidence in the company before markets opened today.

In Iceland – particularly hard-hit by the credit crunch – government officials and banking chiefs were discussing a possible rescue plan for the country’s overstretched commercial banks.

British Chancellor Alistair Darling said he was ready to take “pretty big steps that we wouldn’t take in ordinary times” to help the country weather the credit crunch.

In the past year the Government has nationalised struggling mortgage lenders Northern Rock and Bradford & Bingley.

“The European banking industry is feeling the wind of default blowing from the other side of the Atlantic,” said Axel Pierron, senior vice president at Celent, a Boston, Massachusetts-based financial research and consulting firm.

The erosion has also injured overall confidence and caused concern among investors, politicians and the European public.

The leaders of Germany, France, Britain and Italy met on Saturday to discuss the meltdown that has leapfrogged across the Atlantic from the US to Europe, but shied away from action on the scale of the massive $700bn (€513bn) bail-out passed by the US Congress on Friday and later signed into law by President George Bush.

Their failure to agree to an EU-wide plan highlighted the divisions in Europe on how to deal with the crisis.

France had suggested a multibillion-euro EU-wide government bailout plan, but backed off after Germany said banks must find their own way out.

French president Nicolas Sarkozy’s top adviser, Claude Gueant, insisted that a “common European plan” had come out of the summit.

“What is certain and what the citizens of France and Europe must know is that their (banking) establishments won’t be left in difficulty,” he told Europe-1 radio yesterday.

Icelandic banks expanded rapidly after deregulation of the domestic financial market in the 1990s and have now combined foreign liabilities of more than €100bn – dwarfing the tiny country’s gross domestic product of £10.6bn (€13.7bn).

The government last week took over Iceland’s third-largest bank, Glitnir, a decision that prompted major credit ratings agencies to downgrade both Iceland’s four major banks and its government credit rating.

Looming large was a growing sense that the US Federal Reserve and Europe’s major central banks – which have been flooding euros and dollars to banks that have grown increasingly unwilling to lend money even to themselves – were ready to institute emergency cuts to their benchmark interest rates this week.

None of the banks, including the European Central Bank and Bank of England, has commented on potential rate increases or cuts. But analysts believe the Bank of England, which meets on Thursday, will probably lower its rate below 5%. The ECB left its rate unchanged at 4.25 % on Thursday, but opened the door to a rate cut.

Robert Brusca, chief economist at the New York-based Fact and Opinion Economics, said that the ECB did issue such a cut it would a be a sign “that they’re really, really scared”.