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German guarantee lost in translation

• Robert Peston
• 5 Oct 08, 08:35 PM

I don't now expect an immediate decision by the Chancellor of the Exchequer to follow the example of the Germans and offer a full 100% guarantee to protect the savings of ordinary retail savers.

Why not?

Well Alistair Darling and the Treasury can't get any sense out of the German government about what it is precisely that they are doing.

So there's no point in responding to something that's still a touch ephemeral.

There are two possibilities.

The German Chancellor, Angela Merkel, may be saying that the full financial might of the German state is guaranteeing or underwiting the retail liabilities of German banks - and thus bringing hundreds of billions of additional debt on to the public sector balance sheet.

That's certainly what's implied in briefings by the German finance ministry. And if that's what's happening, it will reverberate all over Europe.

It is the kind of commitment that would at a stroke strengten German banks in the eyes of their creditors.

And if there weren't to be an ebbing away of deposits from British banks, our chancellor and prime minister would have to respond in kind - at the cost of a massive increment to our national debt.

But it is theoretically possible that Angela Merkel thinks she is simply saying what Alistair Darling said at the height of the Northern Rock crisis a year ago, and repeated last week - which is that she's prepared to do whatever it takes to protect the savings of German retail depositors.

That's a rather softer promise, which wouldn't lead to a swelling of the German national debt.

One thing, and one thing alone is crystal clear: European governments are as dazed and confused by the mayhem in the global banking system as most of the rest of us.

So they shouldn't be surprised if money markets open tomorrow even more stressed than they have been of late.

After all it's been another weekend of attempted rescues of banks from Iceland, to Germany, Luxembourg, Belgium and Italy.

Fingers crossed all the relevant battered banks - or in the case of Iceland, a battered economy - have had the salve and plasters attached by dawn.

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Full deposit protection is nigh

• Robert Peston
• 5 Oct 08, 05:04 PM

The decision by the German federal government to guarantee all private savings in German banks is momentous.

In a globalised banking market, in which money can leak across borders like a sieve, it will be almost impossible for the UK not to follow Germany's lead.

I would be immensely surprised if Alistair Darling, the Chancellor of the Exchequer, didn't announce a similar commitment within the next 24 hours.

The formalisation of full protection for depositors throughout the European Union became almost inevitable after similar decisions were taken over the past few days by the Irish and Greek governments.

But Germany is the biggest economy in Europe, a global powerhouse, with a banking sector that for years prided itself on its conservativism.

That Germany is the first of the major European economies to provide 100 per cent insurance to private savers shows just how fragile its banks have become.

The trigger for the announcement seems to have been the desperate straits of Hypo Real Estate, the commercial property lender whose rescue in jeopardy.

But that's only the trigger.

The underlying cause is a near-total collapse of confidence by creditors to banks and by bankers themselves.

Update 19:16

What an unfortunate mess. Just hours after leaders of the UK, Germany, France and Italy promised to co-ordinate their responses to the global banking crisis, Germany seems to have struck out on its own - by offering 100 per cent state-backed insurance to the country's private savers.

The German initiative - which is long on resonance and worryingly short on detail - caught the British Government off guard. The UK Treasury wasn't expecting any such drastic attempt to shore up confidence in Germany's banks.

And although official statements from the German government are unambiguous that savers money will be fully protected by the state, there's a disturbing lack of detail about precisely how this guarantee would work.

For example, it's not clear whether this is a formal, unambiguous commitment to take the retail liabilities of the German banks on to the public sector's balance sheet - a commitment would add many hundreds of billions of euros to Germany's national debt.

Also, to add an almost comic element to Germany's evasive action, almost simultaneously there's been a statement by the EU Competition Commissioner Neelie Kroes that blanket guarantees on bank deposits by individual members states are "discriminatory".

Kroes added that she was hopeful that Ireland's controversial 100 per cent guarantee - launched last week - would be modifiedn in "a form for which we can together state that it is line with the treaty".

At a time when there's profound unease across Europe about the safety and security of our banks, the spectacle of governments seemingly at odds with each other and with the Commission is unsettling, to put it mildly.

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