Greece guarantees deposits: Sarkozy proposes EU bail-out

Europe struggles for a solution as Ireland and Greece guarantee deposits

ATHENS & LONDON – The Greek government has moved to protect all deposits held in Greek banks by the country’s citizens. The guarantee – which has no upper limit – follows Ireland’s move on Tuesday to guarantee all deposits for its six largest banks with a €400 billion package over two years.

As two European Union (EU) members have now resorted to national measures to maintain financial stability, the prospect of brokering a pan-European response to the international liquidity crisis is rapidly drying up. French [and current EU president] Nicolas Sarkozy has proposed one such scheme to create a €300 billion bank bail-out fund. That proposition, working along the lines of the current $700 billion US proposal currently mired in Congress, may already be dead in the water.

British banks have cried foul over the Irish move as investors and consumers begin to move funds to protected Irish rivals. UK prime minister Gordon Brown has reacted to pressure to increase the UK’s deposit protection regime, and the UK Financial Services Authority (FSA) announced today that it will extend depositor protection to £50,000 from existent £35,000 guarantees.

FSA chief executive Hector Sants said in a statement: “In addition, the chancellor has made clear that the authorities will do whatever is necessary to maintain financial stability and protect depositors.”

The problem with national solutions to this crisis is that the large EU banks experiencing liquidity problems are active on a pan-European stage. Recent bail-out recipients Franco-Belgian bank Dexia and Fortis in Belgium, Luxembourg and the Netherlands, required support by multiple governments.

Most of Europe’s large banking groups – Santander, Deutsche Bank and Barclays, for example – operate across multiple EU borders and are also the subject of cross-border supervision. Should it prove necessary to bail out institutions of this magnitude, any solution must involve multiple EU governments, requiring funding on the scale of the US bail-out or Sarkozy’s proposal. It is therefore at an EU-wide level that a comprehensive liquidity solution should be brokered.