Germany offered a blanket guarantee on banks deposits in a bid to contain a spreading credit crisis as officials scrambled to find new capital for least three European banks before financial markets open in what is likely to be a new week of uncertainty.
Germany said it would guarantee more than 500 billion euros (NZ$1.056 trillion) in private deposit accounts to protect savers from the worst global financial crisis since the 1930s. Austria quickly followed suit.
"We say to savers that their deposits are safe," Chancellor Angela Merkel said at a news conference in Berlin. "The federal government is also committed to that."
The German government and banks have also agreed a new rescue package for Hypo Real Estate (HRE) that addresses additional liquidity needs that surfaced at the troubled German lender in recent days, the Finance Ministry said.
Under the deal, commercial banks and insurers would provide an extra 15 billion euros in liquidity for HRE on top of the 35 billion euros they already committed together with the Bundesbank, the ministry said.
The solution will stabilise HRE and strengthen the German finance sector, it added.
A ministry spokesman said HRE was saved and there would be no extra burden on the German tax payer.
In New York, Citigroup Inc won a court order blocking rival Wells Fargo & Co. from moving ahead with its acquisition of hobbled US bank Wachovia Corp in a contested deal also prompted by the credit crisis.
The deposit guarantee announced by Germany, Europe's largest economy, could raise the stakes for EU members to match its terms and restart a debate about Europe's fragmented response to the credit crisis.
In the first crack in EU solidarity, Ireland last week promised to guarantee all deposits in its banks, prompting some depositors in Britain to move savings to Irish bank branches.
On Saturday, leaders of Europe's four biggest economies – Germany, France, Britain and Italy – vowed to restore financial stability but decided against a co-ordinated, US-style bailout.
Analysts said the broad pledge from European leaders stopped short of the more sweeping action required.
"It's like standing on the rails and watching a train coming at you," said Daniel Gros, director of the Centre for European Policy Studies in Brussels.
Meanwhile, expectations are building that finance leaders from the Group of Seven richest nations scheduled for this week in Washington could set the stage for co-ordinated rate cuts as monetary policy makers step into the breach.
The United States last week approved a US$700 billion bank bailout authorising the US Treasury to begin buying up bad debt from banks. But questions abound about how successful the plan will be in unblocking credit markets as the US economy slips into a deeper downturn.
US stocks are expected to remain under pressure after the sharpest single-week decline in seven years with loan markets still extremely tight.
European banks have been hit hard by the fallout from a crisis which began in the United States when the housing market collapsed and bad mortgage debts multiplied.
Belgium and Luxembourg, meanwhile, were seeking a buyer for what remained of bank and insurance group Fortis after the Dutch nationalised the rest. An industry source said BNP Paribas was negotiating for control. The bank had no immediate comment.
In Italy, UniCredit, Italy's second-biggest bank, said it had approved measures to boost its capital by 6.6 billion euros.
The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets and is seen as pushing industrialized countries toward recession.
Benchmark interest rates on three-month dollar loans have been driven higher even as central banks flooded the market with cash. Overnight rates, meanwhile, have dropped to four-year lows, suggesting risk-wary banks are unwilling to lend to each other more than a day at a time.
The resulting pinch has shut down corporate access to credit as earnings fall. As companies cut back, analysts are bracing for tens of thousands of more job cuts and pressure on consumer spending, which represents about two thirds of the US economy. ID:nN26527887
JPMorgan and Goldman Sachs both predict that the United States entered a recession over the past week with growth expected to contract for two consecutive quarters.
Fed fund futures have fully priced in 50-basis point rate cut by the Federal Reserve this month as expectations have built that the European Central Bank could cut rates for the first time in five years.
In another sign of the stress on credit markets, California, the most populous and richest US state and the largest municipal borrower, said last week it might be forced to borrow from the federal government.
Without US$7 (NZ$10.7) billion in new short-term funding, officials say California will run out of cash by month's end, raising the risk of layoffs for police, teachers and other state workers.
With Asian markets set to open for the first time since passage of the US bailout deal, analysts said slower US growth would begin to hit the region.
Goldman Sachs economist Tetsufumi Yamakawa said in a note issued on Sunday that he would cut his forecast of 1.9 percent growth for Japan for 2009 in light of the expectation that the US economy had slipped into recession.