Government under pressure 'to match Germans' over 100% savings guarantee » Central government » 24dash.com

Prime Minister Gordon Brown was under intense pressure today to match his German counterpart by offering to guarantee all private savings accounts.

In a surprise move last night, Germany followed Ireland and Greece in offering blanket protection to depositors if banks failed. The change came just days after Britain extended protection from £35,000 to £50,000 in UK banks.

The issue will be high on the agenda of the first meeting of the new National Economic Council in Whitehall today, amid fears of an exodus of funds from British banks to foreign institutions enjoying state protection.

Both Mr Brown and Business Secretary Peter Mandelson had already voiced concern over the impact of the Irish move, and it is understood that German chancellor Angela Merkel gave no indication of her intention to follow suit when she met fellow EU leaders in Paris on Saturday to seek a co-ordinated approach to the turmoil in the banking sector.

Meeting twice a week in the Cobra emergency briefing room in the Cabinet Office, the NEC will effectively work as Mr Brown's economic "war cabinet" for the course of the financial crisis.

Chaired by the PM, it will also include Chancellor Alistair Darling and other Cabinet ministers with economic responsibilities as well as Whitehall mandarins, with the aim of co-ordinating action across the Government.

There was speculation this morning that its first meeting would see consideration given to an emergency bail-out scheme under which the Treasury could give the banks billions of pounds in return for shares if the crisis worsens.

Conservatives and Liberal Democrats yesterday indicated they would give their support to a recapitalisation scheme of the kind introduced in Sweden in the early 1990s, when the state took shares in a wide range of banks to guarantee their liquidity.

Writing in today's Financial Times, Tory leader David Cameron said: "The least that we need right now is orderly private sector recapitalisation... It is possible to imagine the circumstances in which Government injections of capital, with proper safeguards and strict conditions, may be the best way to protect the long-term interests of the taxpayer.

"Conservatives support Government action when the foundatnios of the banking system on which free markets depend are threatened. We will approach any proposals in a constructive and pragmatic way."

Mr Darling will brief the House of Commons on the credit crunch today in a statement to MPs on their return after the summer break.

The Chancellor said yesterday he was ready to take "some pretty big steps that we wouldn't take in ordinary times" in order to restore stability to the UK banking system.

But he rejected suggestions that he should free the Bank of England from its duty to keep inflation in check, in order to permit a sharp reduction in interest rates.

Many City observers expect the Bank's Monetary Policy Committee to agree to slice a quarter- or half-point off the base rate when it meets on Wednesday, but Liberal Democrat Treasury spokesman Vince Cable has warned that more dramatic reductions are needed to avoid a "once-in-a-lifetime financial collapse".

Mr Darling hinted that he believes the MPC already has enough flexibility, pointing out that its remit requires it not only to keep inflation around 2% but also to support the Government's wider economic policy.

Lib Dem leader Nick Clegg said the German action made a common European approach to deposit guarantees "completely unavoidable".

"Germany is Europe's economic superpower," said Mr Clegg. "Where it leads, others are bound to follow.

"Ireland's action last week to guarantee all deposits made a common European approach to deposit guarantees necessary. Germany's decision today makes it completely unavoidable."

The Treasury's Banking Reform Bill, which will make it easier for the Bank of England to intervene in failing institutions, is expected to be tabled in the House of Commons today or tomorrow and be debated next week.

Conservatives have promised their support to get it onto the statute book as swiftly as possible.

Today's NEC meeting will hear reports on housing from Margaret Beckett and energy from Ed Miliband, as well as an economic overview from the Chancellor, who will also look ahead to tomorrow's Ecofin meeting of EU finance ministers in Luxembourg and the G7 finance meeting in Washington on Friday.

Shadow secretary of state for work and pensions Chris Grayling told GMTV: "If the Government comes up with a sensible proposal it's right and proper that we give them support."

He said people expected the opposition to behave "responsibly" at times of crisis.

"The reality is if the banking system does go very badly wrong in this country it could have a knock on effect in people's lives.

"If a lot of people find they can't access credit in the future, can't access credit cards, bank loans, it changes fundamentally the way people live their lives."

He said if Britain did not guarantee people's savings and every other country did, there could be an adverse affect on British banks.

Asked whether the Government had contingency plans to partially or completely nationalise the banking sector, Treasury Chief Secretary Yvette Cooper said Mr Brown and Mr Darling had said they would do "whatever it takes" to ensure the banking sector remained safe.

"The Chancellor said yesterday that of course that does mean looking at a whole series of pretty big steps that you might not take in ordinary times," she told BBC Radio 4's Today programme.

But she said the Government had already taken action through the special liquidity scheme and support for individual banks.

"We always look at all the options and I think you would agree that it's right in these sorts of unprecedented global times, the kind of events we are seeing right across the world, it is right that we should look at all of the options.

"However, you would also I think understand... that it would be completely wrong for me to speculate about the pros and cons of individual approaches.

"We have also made clear that if we think additional action is needed and additional measures need to be introduced, then we will do so."

Asked whether Germany had informed Britain of its plans before its announcement, Ms Cooper said: "We are still expecting clarification from Germany this morning about what their arrangements are, so we don't have the full details yet."