European Cuntries Ramp Up Deposit Protection

STOCKHOLM, Sweden - Nordic countries Denmark and Sweden moved Monday to bolster protection of bank accounts as stock exchanges across Europe opened lower and central banks pumped more money to cash-starved banks.

In Copenhagen, the Economy Ministry said commercial lenders had agreed to contribute up to 35 billion kroner, or about US$6.4 billion (euro4.63 billion), over two years to a fund that will help insure account holders from losses.

In neighboring Sweden, the government said it would raise the limit for deposit insurance to 500,000 kronor (US$71,000; euro51,322) from 250,000 kronor (US$35,500; euro25,661).

"The measure is about ensuring that bank customers have continued confidence in the financial system," finance minister Anders Borg and capital markets' minister Mats Odell said in a joint statement.

The decisions come after Germany sought Sunday to allay fears about the financial meltdown, enhancing a rescue plan for Hypo Real Estate AG and guaranteeing private bank accounts.

Chancellor Angela Merkel said Sunday that no citizens should fear for the safety of their investments. Hours later, her government announced a new bailout package totaling euro50 billion (US$69 billion) for Hypo Real Estate, Germany's second-biggest commercial property lender.

Hypo said an original euro35 billion (US$48 billion) rescue plan fell apart after private lenders withdrew support, a key element to the proposal, which had already been approved by the EU.

The German bailout deal was on top of the guarantees of private accounts. German Finance Ministry spokesman Torsten Albig said the unlimited guarantee covered some euro568 billion (US$785 billion) in savings and checking accounts as well as time deposits, or CDs.

At the same time, Belgian Prime Minister Yves Leterme said that France's BNP Paribas SA had committed to taking a 75 percent stake in Fortis NV.

Leterme said the Belgian and Luxembourg governments would, in turn, take a blocking minority share in BNP Paribas.

The deal came after two days of closed-door talks between the Paris-based bank, Fortis and government authorities in an effort to restore confidence in the company before markets open Monday.

The efforts appeared to have little effect on markets, with European exchanges from Oslo to Frankfurt opening lower Monday. The Vienna Stock Exchange plunged 8.4 percent at the opening bell, the biggest drop since May 2005. In Frankfurt, the DAX was down 4 percent and in Paris, the CAC-40 fell 4.3 percent. In Oslo, shares were down nearly 6 percent.

In Iceland — particularly hard-hit by the credit crunch — government officials decided, after marathon talks over the weekend, not to offer an economic package to shore up the country's banks.

"The European banking industry is feeling the wind of default blowing from the other side of the Atlantic," said Axel Pierron, senior vice president at Celent, a Boston, Massachusetts, based financial research and consulting firm.

The erosion has also injured overall confidence and caused concern among investors, politicians and the European public.

The leaders of Germany, France, Britain and Italy met Saturday to discuss the meltdown that has leaped across the Atlantic from the U.S. to Europe. But they shied away from action on the scale of the massive $700 billion bailout passed by the U.S. Congress on Friday and signed into law by President George W. Bush.

The failure to agree to an EU-wide plan illustrated the divisions in Europe on how to deal with the crisis.

France had suggested a multibillion-euro (multibillion-dollar) EU-wide government bailout plan, but backed off after Germany said banks must find their own way out.

Icelandic banks expanded rapidly after deregulation of the domestic financial market in the 1990s and now have combined foreign liabilities in excess of euro100 billion (US$138 billion) — dwarfing the tiny country's gross domestic product of euro14 billion (US$19 billion).

The government last week took over Iceland's third-largest bank, Glitnir, a decision that prompted major credit ratings agencies to downgrade both Iceland's four major banks and its government credit rating.

Looming large was a growing sense that the Federal Reserve and Europe's major central banks — which have been flooding euros and dollars to banks that have grown increasingly unwilling to lend money even to themselves — were ready to institute emergency cuts to their benchmark interest rates this week.

None of the banks, including the European Central Bank and Bank of England, have commented on potential rate hikes or cuts. But analysts believe the Bank of England, which meets this Thursday, will likely lower its rate below 5 percent. The ECB left its rate unchanged at 4.25 percent on Thursday, but opened the door to a rate cut.

On Monday, the ECB injected another US$50 billion into money markets while the BoE added another US$10 billion. The Swedish Central Bank increased its lending to 100 billion kronor (US$14.2 billion; euro10.3 billion).

Robert Brusca, chief economist at the New York-based Fact and Opinion Economics, said if the ECB does issue such a cut it would a be a sign "that they're really, really scared."