A consortium of German financial institutions has pulled out of a rescue package for Germany’s second largest commercial property lender, Hypo Real Estate. The BBC reports this:

News of the failed plan came as leaders of the major European economies met in the French capital for talks hosted by President Nicolas Sarkozy.

Britain, Germany, Italy and France all agreed to work together to support financial institutions but did not agree to set up a big rescue fund similar to that of the US.

They decided instead to seek a relaxation of the EU rules governing the amount of money individual states can borrow.

What’s interesting is this: (1) there will be no Europe-wide bailout and (2) they want individual states to have their credit limits raised.  So first of all, the big nations will not take part in a rescue plan that covers the banks of other nations – quite right, I’m very glad about that part.  Secondly, we are transferring the over-leveraged positions of banks onto nations.  Whole nations of taxpayers being lumbered with debt to bail out irresponsible, and now very wealthy, bankers.

The old term ‘moral hazard’ has never been more appropriate.  Do whatever you like and the government will bail you out – meanwhile you keep all the cash!  Mr Sarkozy talks of vague measures but when the dust settles I’d like to see just how many heads have actually rolled into his little guillotine basket:

Mr Sarkozy announced a series of other measures – including unspecified action against the executives of failed banks.

Speaking after the meeting at a joint news conference, he said the four had agreed that the leaders of a financial institution that had to be rescued should be “sanctioned”.

The Germans do not want to intervene but at the same time they don’t want to be the only ones that don’t do so as it puts their banks at greater risk in comparison to overseas competitors:

Meanwhile German Chancellor Angela Merkel called on EU countries not to take steps at home that could cause problems for other member states.

Meanwhile, it is becoming clear that there has been no particular rush to transfer cash from UK banks into Irish ones.  Perhaps people have realised that the guarantee only means something if the country has the money to back it up.

This is starting to sounds like something from a film.  Banks are falling like dominoes.  

1. We’ve all been worried about Kaupthing Edge and IceSave but here we are witnessing the nationalisation of Glitnir Bank. The Icelandic Government has taken a 75% stake in Glitnir for around £468 million after the company faced funding problems.  

Given that Iceland is a small nation – something like 300,000 people – whose banks rely on getting funding from international money markets, the news that the Icelandic Crown is down even further today will not help.  The remaining banks will effectively have to pay even more for their borrowing than before.  If Kaupthing Edge or IceSave need to borrow any money in the short term where will it come from?  I had some of my savings in IceSave but have transferred them to a UK bank. 

2. Bradford & Bingley nationalised.  The government provided a £14bn loan to protect customers’ deposits but the interest charged on this loan will have to be paid by other UK banks.  In other words the bank that goes bust leaves a mess that the more prudent banks have to pay for.  

3. The Netherlands, Belgium and Luxembourg have all chipped in to prop up Fortis with £8.9bn.  Smaller nations like Belgium and Iceland bailing out huge banks – I wonder how much money they have left to keep doing it if required.  Come to think of it, how will we keep doing it?  More borrowing.

Also in Europe:

Munich, Sep 29, 2008 – Hypo Real Estate Group has secured a major new credit facility which is designed to shield the company from the impact of the current malfunctioning of the international money markets.

Hypo Real Estate Group, Press release, 29.09.08

Did they say “current malfunctioning”?  I think they mean the current rationalisation of an industry that has been malfunctioning for at least a decade.  Also today, Hypo got rid of quite a few of its directors – strange if it’s just a malfunctioning market.  Anyway, the $50bn loan guarantee should keep afloat Germany’s second biggest commercial property lender.

4. Citigroup is rescuing Wachovia, the fourth largest US bank.  Citigroup is in no great shape itself but if it survives this era of financial meltdown it will be another banking giant.  This period of consolidation is likely to result in some truly enormous banks.

5. $620 billion pumped into the market from the Federal reserve but still markets around the world are today in turmoil.  The $700 billion rescue package or criminal misuse of public funds, depending on your opinion, has just been rejected although no doubt it will be back tomorrow in a different form.  Regardless of whatever measures are taken I am certain that more banks will fall.

So, are my savings safe?  They can be with a few different techniques.  Read my earlier posts How to get 100% protection on savings and Are my savings safe to see how.