German Government's Guarantee on Deposits `Political' (Update1)

Oct. 6 (Bloomberg) -- Germany's guarantee of bank deposits held by private savers is a ``political'' step meant to boost confidence in the banking system, the government said, ruling out any parliamentary moves to back up the pledge in law.

The government and the individual parties in Chancellor Angela Merkel's coalition ``stand by this guarantee with their word,'' Finance Ministry spokesman Torsten Albig told a regular government press briefing in Berlin today.

``There will be no legislative notification; it's a political declaration,'' Albig said. ``It's a very clear signal that people can have faith in their savings-account, current-account and fixed-term deposits.''

The government was forced to shore up faith in the banking system yesterday as it scrambled to put together a 50 billion-euro ($68 billion) rescue package for Munich-based Hypo Real Estate Holding AG while at the same time guaranteeing bank deposits. Albig also hinted that the government is considering a package of measures to mitigate any future financial collapse.

Finance Minister Peer Steinbrueck has ``pointed out that we have to think about how we can organize future processes to protect financial markets generally,'' Albig said. ``We have to think how we can plan rescues or set up other structures with financial markets to protect financial markets.''

Emergency Sitting

Steinbrueck, in an interview with Deutschlandfunk radio today, said there was a need to try and put an ``umbrella'' over Germany to protect the financial industry. Merkel canceled a speech in the Belgian city of Bruges tomorrow to attend an emergency sitting of the lower house of parliament, the Bundestag, which is scheduled to debate the financial situation.

``The basis of every financial system is trust, and the federal government is bolstering that trust,'' chief government spokesman Ulrich Wilhelm said at the Berlin briefing. Guaranteeing private savers' deposits ``was important and necessary,'' he said.

``People are nervous, angry,'' giving Merkel no choice other than to offer the guarantee, Otto Bernhardt, finance spokesman in parliament for Merkel's Christian Democrats, said in an interview. ``We don't want a run on the banks as we saw with Northern Rock.''

The U.K. government took Northern Rock Plc into public control in February after depositors lined up to remove their savings in the first run on a British bank in more than a century.

Backbone of Economy

In Germany, consumer deposits, including the accounts of small, privately held businesses which make up the backbone of Europe's biggest economy, added up to 568 billion euros at the end of 2007, Albig said. Even so, there is ``no indication'' Germany will have to act on its guarantee and there is no effect at present on the budget because it doesn't involve any kind of financial support package, he said.

European Union leaders issued a joint statement today pledging to ``take whatever measures are necessary'' to protect banks and deposits.

Italian Prime Minister Silvio Berlusconi told a political rally late yesterday that he'll propose that EU governments contribute 3 percent of gross domestic product to a bailout fund to guarantee deposits at European banks. Berlusconi is scheduled to hold a joint press briefing with Merkel in Berlin at 7:30 p.m. today.

Brown, Merkel

U.K. Prime Minister Gordon Brown's government, which on Oct. 3 raised the value of deposits it insures to 50,000 pounds ($88,500), is reviewing the impact of Germany's decision to guarantee bank deposits. Sky News reported that Brown planned to discuss the matter with Merkel today.

Also today, Denmark guaranteed all bank deposits in an agreement funded by the country's commercial lenders equivalent to 2 percent of gross domestic product, the Economy Ministry said. Greek Finance Minister George Alogoskoufis reiterated a ``political commitment'' to guarantee deposits.

Ireland's parliament on Oct. 2 passed legislation guaranteeing 100 percent of the deposits and debts of six banks. Banks in the U.K. say the Irish decision will distort EU competition.

The German government sees ``significant differences'' between its decision and the Irish law, Albig said.

Until now, private savings accounts in Germany, including those of smaller, privately held companies, have been guaranteed by 180 banks, the BDB private banks group said Oct. 2. German banks fulfill minimum guarantee levels set by the EU and provide further security for unlimited amounts in agreements between themselves. The minimum guarantee covers 90 percent of an account's balance to a maximum of 20,000 euros, the BDB said.

1930s Germany

No private account holder has lost money in a bank insolvency in Germany since the 1930s, Wolfgang Gerke, director of the Frankfurt School of Finance and Management, said in a telephone interview.

Merkel and Steinbrueck ``have offered psychological balm for worried savers,'' Gerke said. ``They're not writing the pledge in any law as Ireland has -- a sign that they're really relying on private bank guarantees.''

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net.