Governments back savers as banking gloom spreads

By Jeremy Gaunt and Matthias Sobolewski

LONDON/BERLIN (Reuters) - More European governments followed Germany's lead on Monday offering blanket deposit guarantees to savers in a frantic effort to calm fears among investors over the worst financial crisis in 80 years.

However, the moves failed to comfort financial markets as investors from Tokyo to London slashed risk from portfolios and positioned for a further tightening of credit and bank lending and the rising risk of a serious global economic recession.

Despite concerted efforts to stem the crisis, investors were clearly seeking more concrete steps from authorities, perhaps in the form of coordinated action from next weekend's meeting of the Group of Seven industrial nations.

In a sign that the crisis is biting deeper in Asia, South Korea said it wanted to hold talks with China and Japan.

The Bank of Japan offered to lend 1 trillion yen ($9.68 billion) against pooled collateral in an auction to inject liquidity into the market.

In Europe, Sweden became the latest country to act, with the government saying it would expand bank deposit guarantees and the central bank raising the amount of loans offered to banks.

It followed Germany's pledge on Sunday to guarantee private deposit accounts, a move which spurred similar action by Austria and Denmark. Ireland issued the first such guarantee last week, prompting criticism of a fragmented European Union response.

European banks have been hit hard by the fallout from a crisis that began in the United States when the housing market collapsed and bad mortgage debts multiplied.

The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets, pushing industrialized countries closer to recession.

"We have a seriously weak and fear-driven market on our hands," said Tom Hougaard, chief market strategist at City Index in London.

BANK RESCUES

The various deposit guarantee moves were putting intense pressure on countries such as Britain, which face the prospect of a drain in deposits from their banks.

Britain's government promised on Monday it would not leave ordinary savers unprotected but said it had no plans to respond immediately to the surprise move by Germany.

German Finance Minister Peer Steinbrueck said Berlin was working on a new plan to protect the entire German bank sector, not just individual institutions that came under stress.

"I am very much aware that at some point individual solutions are no longer enough," Steinbrueck told reporters.

He said officials were discussing a "Plan B" but made clear this would not be a Europe-wide solution that would mirror the $700 billion rescue package agreed in the United States.

Finance ministers from the euro zone countries were to meet in Luxembourg on Monday.

In the banking industry, France's BNP Paribas scooped up the assets of Fortis in Belgium and Luxembourg for 14.5 billion euros ($19.71 billion) to stem a cash drain on Fortis and Dexia.

Over a frantic weekend, German officials also clinched a revised rescue deal for lender Hypo Real Estate that will see commercial banks and insurers provide 15 billion euros in liquidity, on top of an initial pledge of 35 billion euros.

For its part, the U.S. Federal Reserve was pushing Citigroup Inc and rival Wells Fargo & Co to compromise over their competing bids for hobbled U.S. bank Wachovia Corp that could result in them carving up its assets.

VARIETY OF RESPONSES

None of the moves were reassuring investors on Monday, however.

The pan-European FTSEurofirst 300 stock index was down 4.8 percent, stocks in Asia-Pacific outside Japan dropped nearly 6.5 percent and Japan's Nikkei average hit a 4-1/2 year low.

In addition, demand for the relative safety of government bonds rose, with short-term euro zone debt yields falling sharply.

Governments across the globe battled to contain the crisis.

South Korea's finance minister said the country would dip into the world's sixth-largest foreign exchange reserves to help with loans.

Spain's government was reported to be considering purchasing bank debt and increasing bank deposit guarantees. Prime Minister Jose Luis Rodriguez Zapatero may meet with bank leaders on Monday, La Vanguardia newspaper said.

In Iceland, officials including from the central bank, have been working on a financial stability plan to address a crisis that has sent the country's currency spiraling lower and is seen as threatening its financial sector.

(Additional reporting from Paris, Frankfurt, Brussels, Luxembourg, New York, Washington, Sydney, Seoul, Beijing, Stockholm)