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How close to capitulation?

• Robert Peston
• 6 Oct 08, 03:47 PM

Blimey it must be serious.

Every European Union leader has signed up to the following statement:

"All the leaders of the European Union make clear that each of them will take whatever measures are necessary to maintain the stability of the financial system - whether through liquidity support through central banks, action to deal with individual banks or enhanced depositor protection schemes.

"While no depositors in our countries' banks have lost any money, we will continue to take the necessary measures to protect both the system and individual depositors. In taking these measures, European leaders acknowledge the need for close coordination and cooperation."

So the mayhem of uncoordinated statements and actions over the past few days by the governments of Germany, Denmark, Sweden, Ireland and Greece was simply an accident.

They're all back on the same hymn-sheet today.

Investors seem underwhelmed: the FTSE 100 index is tumbling and shares are currently almost 8% lower.

If sustained this would make it the third worst fall in the history of the FTSE 100 index.

Does this mean we're close to that fabled moment in stock markets - the point of capitulation - when investors lose all hope and dump their stock at any price?

According to the theory, there can be no sustained recovery until the markets are in the clutches of utter despair.

Not everyone subscribes to the pseudo-economic psycho-babble.

But it certainly looks hairy out there.

UPDATE 17:35PM:

Today was when no one could be under any illusion that the global banking crisis is primarily a North American phenomenon.

There's a mess in Europe too, because European banks were also seduced over the preceding few years into lending too much to cheaply to consumers and businesses.

In the past 24 hours, we've seen bank rescues in Belgium, Luxembourg and Germany, and an attempted rescue of an entire economy, that of Iceland.

We've also had the worrying spectacle of apparent disunity among the governments of Europe, with Germany, Denmark, Sweden and Spain all taking unilateral steps to reassure their savers - which risked destabilising banks in other countries.

And when EU government heads then issued an emergency joint statement promising to collaborate more closely, curiously that served to spook investors even more - presumably because it underlined the fragility of the banking system.

What's also prompted high anxiety among investors and bankers is the mounting evidence that the crisis in financial markets is causing a severe economic slowdown.

And when there's a collision of a financial and economic downturn, well the consequence can be painful - because rising unemployment leads to more loans going bad which further weakens our banks.

So the chancellor's plan to strengthen our banks by injecting taxpayers money in the form of new capital is also an economic recovery plan.

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What the Germans did

• Robert Peston
• 6 Oct 08, 10:27 AM

It gets weirder.

My official sources tell me that the German government is not legislating to formally increase protection for savers.

What Angela Merkel did, they say, was give a "political" commitment that no German savers would lose a penny - which is more-or-less identical to the commitment given by our Chancellor of the Exchequer, Alistair Darling

But the horse has already bolted - in that this morning the Danes have given an unlimited guarantee to their savers and the Swedes have massively increased the level of protection they offer.

Whether the German or British governments like it, there does appear to be a clear trend towards almost total protection for European retail depositors.

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Monday morning feeling

• Robert Peston
• 6 Oct 08, 07:20 AM

Welcome to another anxious Monday morning.

Money markets are deeply stressed again, with the Asian rates for lending between banks for three months remaining at their highest level since last December.

Asian stock markets are falling, with Japan down 5%.

And it's the troubles of Europe's banks, and the messy response of the authorities, that's to blame.

First, let's accentuate the positive.

's Belgian and Luxembourg operations have been bought - and effectively rescued - by the mighty of France for just under 拢12bn in shares and cash.

The troubled German property lender, , has been rescued for the second time in a week, with a package of loans provided by the government in partnership with a consortium of banks and insurers.

And the UK seems to have moved a step closer to announcing the details of a contingency plan being worked on in the (which I described in my note on Saturday) to inject billions of precious new capital into British banks.

So far, so reassuring.

But.

We still don't know how and what the Icelandic government will do to restore confidence in its banking system.

There's talk of a great national effort, or the use of its citizens' 拢8bn of pension savings to provide financial support to banks that may need it.

But as of now, it's unclear what Iceland will attempt to do to stem the flight out of its currency and shore up banks that have borrowed 拢80bn in foreign currencies (and see my other Saturday note, "Markets call time on Iceland").

Finally, there's the residual uncertainty about the extent of Germany's guarantee to holders of private accounts.

It certainly looks as though it's providing 100% insurance to 拢450bn of deposits. Which seems fairly ambitious, and will put pressure on the UK government to do something similar.

But here's the thing: retail deposits in the UK are much greater than that, some 拢950bn, according to an analysis by the City watchdog, the .

In other words, we in the UK appear to hold more of our savings in authorised banks than seems to be the case in Germany.

So for the UK to offer 100% protection would put a proportionately great strain on the public sector's balance sheet.

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