(an email exchange)
If everyone in Germany tries to take their funds out of the banks they won’t get it, with or without the backing of the German government.
German government insurance can buy them some time, maybe even enough time to make it through if aggregate demand wasn’t falling off so fast.
In the U.S., U.K., Japan and any nation with its own currency and fiscal authority behind the deposit insurance you can get all the funds you want on demand.
> Finally, the Germans seem to get it. This might be the best news of the
> weekend. But they need to take the final step. Problem is there
> is no EU treasury or debt union to back up the single currency.
> The ECB is not allowed to launch bail-outs by EU law.
> Each country must save its own skin, yet none has full control of
> the policy instruments. How do they change this in a hurry?
With great difficulty!
By Bertrand Benoit
The German government was last night drawing up a multi-billion euro contingency plan to shore up its banking system, which could see the state guarantee interbank lending in the country and inject capital in its largest banks.
The contingency draft, closely modelled on the British initiative announced this week, marks a dramatic political U-turn for Europe’s largest economy after Angela Merkel, chancellor, and Peer SteinbrÃƒÆ’Ã‚Â¼ck, finance minister, both ruled out a sector-wide state rescue for banks this week.
A senior government official said Ms Merkel and Mr SteinbrÃƒÆ’Ã‚Â¼ck would decide on Sunday which of the measures to implement after consultation with their European partners. Once a political decision was made, he said, the plan could be implemented in the following days.
“We are considering all the options at present to the exception of a massive state acquisition of toxic assets,” the official said. “Whatever we do will be done in close co-operation with our G7 and European partners.”
France announced last night that it was planning an emergency European Union summit tomorrow.
Speaking in Washington ahead of a meeting of Group of Seven finance ministers, Mr SteinbrÃƒÆ’Ã‚Â¼ck said the time had now come for “a systemic solution . . . I am convinced that case-by-case solutions are no longer helping. They are now exhausted.”
The official said Ms Merkel was in daily contact with Nicolas Sarkozy, French president, suggesting that the plan, if approved, could be launched as a joint initiative.
Ulrich Wilhelm, the government spokesman, said: “It is the duty of the federal government to be prepared and to review all options . . . As of now, no political decision has been made.”
Under the draft, Germany could issue a state guarantee for interbank lending worth more than ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬100bn and provide direct lending to the banking sector. Berlin is also contemplating offering several dozen billion euros of capital to the banks in exchange for equity and may take entire ownership of some institutions.
As an additional option, the government is considering extending the blanket guarantee it issued last Sunday for account deposits to money market funds, which have experienced a steep outflow of savings lately. Fund managers have had to divest considerable quantities of assets to cover the withdrawals.
Bankers said the interbank lending market in Germany had reached near-gridlock.