Europe Fails to Find Coordinated Response to Financial Crisis

By Brian Swint and Stephanie Bodoni

Oct. 7 (Bloomberg) -- European finance ministers failed to agree on steps to shore up the banking system hours after their countries' leaders pledged to do whatever was needed to restore confidence.

There appeared to be little support for suggestions from France and Italy that Europe create a U.S.-style bank rescue fund at yesterday's monthly meeting of euro-area finance ministers in Luxembourg.

Italian Prime Minister Silvio Berlusconi and French Finance Minister Christine Lagarde both have suggested a plan modeled after the $700 billion U.S. fund approved by Congress last week. The ministers in Luxembourg failed to reach consensus on anything beyond a reiteration of a promise by heads of state to protect bank deposits.

``We all agreed that we want to do all we can to avoid financial institutions of systemic importance failing,'' Luxembourg Finance Minister Jean-Claude Juncker said after the meeting. ``We reinforced arrangements concerning deposit protection.''

Officials in countries across Europe, mostly acting unilaterally, are rushing to rescue banks on the brink of collapse as the global credit squeeze bears down on the continent. Europe's Dow Jones Stoxx 600 Index had its steepest decline in two decades yesterday and the euro fell below $1.35 against the dollar for the first time in more than a year.

``One country's solution is another country's problem,'' Swedish Finance Minister Anders Borg told reporters in Luxembourg today. ``We need to push for common solution'' on deposits.

`Going Their Own Way'

``As far as I can tell, everyone's going their own way,'' said Peter Dixon, an economist at Commerzbank AG in London. ``They can give blanket guarantees. They're almost meaningless, because depositors weren't going to lose money anyway. But it does take some of the heat out of the system.''

Before yesterday's meeting, European Union leaders pledged to protect depositors from losing their savings to bolster confidence as share prices tumbled.

EU countries ``will take whatever measures are necessary to maintain the stability of the financial system,'' the 27 EU member countries said in a joint statement that was released by Berlusconi's office. ``We will continue to take the necessary measures to protect the system so that individual depositors in our countries' banks do not suffer any loss of money.''


That statement followed earlier pledges by German Chancellor Angela Merkel and French President Nicolas Sarkozy to guarantee savings accounts.

Confidence

Increasing deposit guarantees to up to 100,000 euros is ``an issue under examination,'' Irish Finance Minister Brian Lenihan told reporters in Luxembourg today. ``To restore confidence amongst depositors is very important. An increase in guarantees is only one element in the solution.''

Berlusconi two days ago said Italy would propose that EU governments contribute 3 percent of gross domestic product to a bailout fund to guarantee deposits at European banks. He said that other leaders were warming up to the idea. Italy didn't present the proposal at yesterday's meeting.

France's Lagarde floated a similar proposal last week, telling the German newspaper Handelsblatt that a ``rescue package'' was needed to help ``smaller'' European states ``threatened with a banking failure.''

Germany shot down that idea, and Henri Guaino, a special adviser to Sarkozy, later distanced the president from Lagarde's proposal, saying in a telephone interview that ``France has neither studied nor proposed a plan of that type.'' Differences between Germany and France were apparent again yesterday.

France, Germany

``Coordination between all of us is very important,'' said Lagarde said at yesterday's Luxembourg meeting. In Berlin, Merkel stressed that ``each member country must tackle its own problems and we can't risk creating new dangers to the banking system.''

The finance ministers yesterday achieved little beyond what the leaders of Europe's four biggest economies did this past weekend. At that summit, Germany, the U.K., France and Italy also failed to agree on a unified response, pledging instead to work together to limit the economic fallout, ease accounting rules and seek tougher financial regulations.

``We have discussed recapitalization, liquidity, also minimum deposits,'' Luxembourg Economy Minister Jeannot Krecke said in an interview with Bloomberg Television. ``We have some kind of agreement on the deposits.''

`Rescue Umbrella'

Even that agreement was undermined by discord over a plan by Ireland to protect not only deposits in six local banks but also loans they have taken. The German government criticized the Irish measure as distorting the European market, with Deputy Finance Minister Joerg Asmussen calling it ``a rescue umbrella that discriminates in the internal market.''

The European Central Bank said the Irish government should have ``properly'' informed the EU before announcing the bank- guarantee plan. And EU Competition Commissioner Neelie Kroes asked Ireland to expand the measure to include non-Irish banks to comply with EU rules that prohibit discriminating in favor of domestic institutions.

``We've seen negative consequences if a country goes off on its own with unilateral action,'' EU Commissioner for Economic and Monetary Affairs Joaquin Almunia said in Luxembourg. ``We need a clear, coordinated, European approach.''

The debate followed rescues of major European institutions in recent days. Amsterdam- and Brussels-based Fortis, Dexia SA, which is based in Brussels and Paris, and Hypo Real Estate Holding AG of Germany required lifelines to avoid collapse.

Europe's Dow Jones Stoxx 600 Index sank 7.6 percent yesterday, the steepest drop since October 1987. Europe's plunge helped erase about $2.5 trillion from global equities as investors disregarded the U.S. Treasury plan to revive credit markets with a $700 billion bank bailout.

European stocks rebounded today as a bigger-than-expected interest-rate cut in Australia spurred speculation central banks around the world will reduce borrowing costs to cushion their economies from the credit freeze. The Stoxx 600 advanced 2.6 percent to 247.68 at 8:05 a.m. in London.

To contact the reporters on this story: Brian Swint in Luxembourg at bswint@bloomberg.net; Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net.