Treasury Anger at German Savings Move

The Treasury was under pressure last night to guarantee the savings of all depositors in British banks after Germany announced it was following the lead of the Irish and Greeks and offering a blanket guarantee on all savings - currently worth €568bn (£440bn).

Britain had just agreed to raise its level from £35,000 to £50,0000 but may yet need to take more radical steps to avoid a flight of savings.

British officials were furious with the German chancellor, Angela Merkel. They pointed out that she had given no indication of the move over the weekend during a summit in Paris designed to coordinate a European response to the economic crisis. The Treasury was last night trying to establish the implications of the German move.

Speaking of the decision by the Greek and Irish governments to offer blanket guarantees, the new business secretary, Peter Mandelson, said yesterday: "It would be better while operating on a country by country basis, we did so in a coordinated way and we brought a collective European view. We are all interlocked. We are in this together."

The German move came as the Treasury was preparing a contingency plan to take a stake in failing British banks to recapitalizes them. This gained the support of the Conservatives and Liberal Democrats yesterday.

Today the chancellor, Alistair Darling, is due to make his first Commons statement on the credit crunch since the financial turmoil exploded on the markets, but he is not expected to make any major policy statements or announce support for recapitalisation with taxpayers' money.

However, he hinted that ministers were looking at more dramatic options when he told BBC 1's Andrew Marr Show he was "looking at a whole range of proposals ... and that means looking at some pretty big steps that you would not take in ordinary times, but we are ready to take them".

Mandelson said every option, including recapitalization to take a non-controlling stake in a bank rather than a government takeover, would have to be considered.

In a significant shift in position, the Conservative leader, David Cameron, said he favored a recapitalization to strengthen the banking system. "It is something parties should talk about, and I think it is something where consensus would be better than opposition," he said.

Previously the Tories had spoken of ailing banks being taken over by the Bank of England to run them down and sell off their profitable assets.

The shadow chancellor, George Osborne, said yesterday that the government may need to follow the lead of Sweden in the 1990s and buy stakes in a host of banks to shore up their finances.

"The ad hoc approach is coming to an end and we need to look at much bigger solutions," he said.

"We stand here willing to talk to the government about this but at the moment Gordon Brown's approach - which is 'look, I'm going to deal with this on a case by case basis' - is running out of road."

Cameron added: "The problem at the moment is that the banks are not lending to one another, the Bank of England is meant to be the lender of the last resort. There is a danger of it becoming the lender of the only resort.

"There is only one thing worse than state aid for the banks, and that is doing nothing."

Darling has already allowed the Bank to put £40bn into the market this week to ease the problems of banks accessing money, but there are increasing signs that this is dealing merely with the symptoms of the problem.

The chancellor also gave a broad hint that he feels the Bank of England is free to cut interest rates on Thursday when he said its remit was not confined to controlling inflation. "The Bank of England also has a wider duty to support the government's economic objectives," he said.

He did, however, reject calls from the Liberal Democrat treasury spokesman, Vince Cable, to specifically change the Bank's remit, saying such a move would undermine its independence. Cable had warned: "We are in a real crisis situation. In an edge of the cliff environment."

Darling is due today to publish his banking reform bill and jointly chair the first meeting of the new national economic council. The bill will contain measures on guaranteeing depositors' savings and follows talks with Conservatives and Liberal Democrats.

On Wednesday in the Mais lecture, Darling is exected to drop a broad hint that the scale of government borrowing, in part induced by the financial crisis, means he will be unable to meet the government's so-called sustainable investment rule.

The rule laid out by Gordon Brown in 1997 sets out that borrowing must be strictly limited to ensure that Britain's total public sector debt never exceeded 40%of national income.

Without setting out entirely new rules on borrowing and investment, Darling said he will set out in his lecture his thoughts on what the new rules should be.