Facing a potential breakdown in its banking system, the German government has decided to offer a blanket guarantee to private savings deposits (see comments below from German blogger egghat about this distinction), much as Ireland and Greece have done. As much as I praise this move on the part of the Germans to restore confidence, it still leaves Hypo Real Estate (HRE) dangling on the verge of collapse and does little to improve liquidity considerations in the inter-bank market. The basic problem here and now is that banks borrow short and lend long.
Bloomberg supplies the following report of the German government move:
The German government offered to fully guarantee personal savings accounts in a bid to ease concerns about the stability of the nation’s banking system amid the global credit crunch.
“Finance Minister Peer Steinbrueck said today that people in Germany will not lose a single euro of their savings because of this crisis, and that statement applies as of today,” said his chief spokesman, Torsten Albig, in a telephone interview from Berlin.
Until now, private savings accounts, including the accounts of small, privately held companies, have been guaranteed by 180 banks in Germany, the BDB private banks group said on Oct. 2. The guarantees of the banks covered 90 percent of an account’s balance to a maximum of 20,000 euros ($27,500), the group said.
The announcement of the guarantee comes as Germany’s government is today trying to salvage a 35 billion-euro ($49 billion) bailout plan for Hypo Real Estate Holding AG after the ailing property lender said commercial banks withdrew their support for the program.
–Bloomberg
This move by the German government is much needed to restore confidence to the banking system. Germans had begun to think the Euro was weak due to ‘contagion’ from the pejoratively named PIGS (Portugal, Italy, Greece and Spain) of southern Europe. Widespread reports of Germans rejecting Euro notes printed in those countries have been making the rounds in the German press. With the HRE crisis, Germans have become fearful about the security of their money on deposit.
However, the guarantee only covers savings deposits so it is a partial solution. Moreover, what about HRE? Its problem is clearly a liquidity constraint as it cannot roll over funding needs due to the shutdown in credit markets worldwide. To address the credit crisis, interbank counterparty risk must be addressed as well.
I will be reporting more on this story in future posts as information becomes available.
Related posts
Crisis in Europe: an article I wrote in today’s Guardian
Source
German Government to Fully Guarantee Private Accounts – Bloomberg