European governments strive to avoid bank meltdown

LONDON (AP) – European governments struggled to find a coordinated response to the crisis sweeping financial markets Monday, as countries announced sweeping deposit guarantees on their own to try and shore up their banks, while stock markets plunged.

Iceland and Denmark became the latest countries to declare a deposit guarantee Monday after a startling announcement by German Chancellor Angela Merkel on Sunday that her government would guarantee all private bank savings and CDs held in the euro zone’s largest economy. “We want to tell people that their savings are safe,” she said.

Faltering confidence in the financial system, undermined by a series of bank bailouts, was precipitating the measures, analysts said, since a failure to match guarantees by Ireland, France, Greece and Sweden could risk a massive fund outflow. Yet the guarantees themselves raised questions about their potential impact on government finances, and showed European governments were unable to find a unified approach, despite a weekend summit where they agreed to do just that.

“Governments have no choice but to give the guarantees on deposits, otherwise we will see runs on banks and a complete loss of business and consumer confidence,” Neil Mackinnon, chief economist at ECU Group, said.

“The stakes have never been higher,” he added.

Markets responded to the disarray by sinking rapidly, following selloffs in Asia.

In the U.S., the Dow Jones industrials plunged 570 points to 9,747.

Meanwhile, the euro slid below the $1.36 mark for the first time in over a year.

The crisis engulfing Europe and its markets has fueled talk of coordinated interest-rate cuts by the world’s leading central banks, possibly as early as Monday.

Analysts said they wouldn’t be surprised if the U.S. Federal Reserve, the European Central Bank and the Bank of England instigate the first joint action on interest rates since the Sept. 2001 terrorist attacks on the United States.

“I think we will see interest-rate cuts this week,” said ECU Group’s Mackinnon.

Additionally, the Fed said 28-day and 84-day cash loans being made available to banks will be boosted to $150 billion each, effective Monday. Those increases will eventually bring the amounts outstanding under the program to $600 billion.

British Prime Minister Gordon Brown planned a call to Merkel to discuss the crisis, and Britain’s Treasury chief, Alistair Darling, was due to make a statement to Parliament later.