The European Union pledged on Monday to protect people's savings and maintain financial stability while Washington urged a more coordinated approach to the worst banking crisis in nearly 80 years. Amid criticism of a fragmented EU response, French President Nicolas Sarkozy issued a statement from the 27 member states saying individual countries would do all they could to safeguard the financial system. “Each one of us will take all the necessary measures to ensure the stability of the financial system,” Sarkozy said. More European governments followed Germany's lead to increase guarantees to bank savers but individual moves by governments and financial authorities to calm investors across the world failed to comfort markets. Investors from Tokyo to New York dumped riskier assets in alarm at the prospect of further tightening of credit and bank lending and a potentially serious global economic recession. In Frankfurt, with no let-up in market turmoil in sight, analysts say a coordinated interest rate cut by the European Central Bank, the Bank of England and the US Federal Reserve is becoming more and more likely as a way to help revive lending between the world's banks. The world's major central banks have been offering almost constant cash injections to jittery markets over recent weeks to keep the financial system afloat. European banks offered more than $74 billion on Monday alone. Luca Cazzulani, a strategist with UniCredit in Milan, said that has not been enough to address the key problem of wary banks' reluctance to lend to anyone - including each other. “I think at this point (a coordinated cut is) quite likely with the current spread of problems at full strength on the European financial system,” Cazzulani said. Cazzulani said a coordinated move should be made as soon as possible and he could envision each bank dropping rates by a quarter of a percentage point. That would bring the ECB down to 4 percent, the Bank of England down to 4.75 percent and the Fed to 1.75 percent. Any joint action on interest rates would be the first since the ECB and the Fed moved together to cut rates following the September 11, 2001 terrorist attacks on New York and Washington, he said. Howard Archer, an economist with Global Insight in London, said a coordinated effort could do a lot for sentiment. He said such a cut is not his “central scenario” as he looks ahead to a Bank of England rate decision scheduled on Thursday, but he did not rule out other banks joining in. “Things seem to be getting worse. The longer this happens, the greater the chances” of a coordinated cut, he said. Archer said he expects the Bank of England to lower its benchmark rate by a half percentage point to 4.5 percent from 5 percent Thursday - and not before then - whether in coordination with other banks or not. The Federal Reserve said Monday it would start to pay interest on bank deposits for the first time and expand bank refinancing operations to 900 billion dollars by year-end in a bid to increase liquidity. The payment of interest on reserve balances “will give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target established by the Federal Open Market Committee,” the central bank said in a statement. The emergency financial sector bailout passed by Congress and enacted Friday by President George W. Bush accelerated the effective date of authorizing the Fed to begin paying interest on deposit balances to Oct.1 from a 2006 law that set the date on Oct. 1, 2011. The Fed said it was “substantially” increasing the size of the Term Auction Facility (TAF) auctions, beginning with Monday's auction of 84-day funds. The TAF auctions allow banks to borrow from the Federal Reserve for a fixed term at a rate established in the auction, subject to a minimum set by the Fed. The operations allow banks to borrow at the Fed's discount rate, at an interest rate usually higher than charged on the interbanking market. Germany pledged on Sunday to guarantee private deposit accounts, following earlier moves by Ireland and Greece, and other European governments followed suit. The German government also defended its pledge to guarantee personal savings amid ongoing market turbulence as “an important step at the right moment.” In a joint statement, Chancellor Angela Merkel and her Finance Minister Peer Steinbrueck said the government would guarantee private bank accounts, and some 568 billion euros ($785 billion) in personal savings and checking accounts as well as time deposits, or CDs. Finance Ministry spokesman Torsten Albig said the sums in all three categories were “certain to be more than a thousand billion,” or a trillion. Irish President Mary McAleese signed into law a bank-guarantee bill, granting taxpayer protection to all deposits and debts of Irish-owned banks, worth some 440 billion euros ($600 billion). Britain promised to protect ordinary savers in the face of global financial turmoil but shares in the country's banks fell sharply amid fears the government would seek partial ownership in return for support. Shares in New York fell more than five percent while Europe's main index was on course for a record one-day fall in percentage terms. Many investors wanted more concrete steps from authorities, perhaps in the form of coordinated action from next weekend's meeting of the Group of Seven industrial nations. Economies that gained most from the boom in commodities demand and surging global expansion in the last three years were at the sharp end of market moves. Emerging market stocks as a whole were down 10 percent. Iceland's crown tumbled 30 percent against the euro after the government failed to produce a stability plan over the weekend. The country has been a prime target for foreign deposits over the past few years because of its high interest rates. Demand is now unwinding rapidly as investors flee anything considered risky. Governments and financial authorities, meanwhile, battled to restore confidence. The Bank of Japan offered to lend 1 trillion yen ($9.68 billion) to banks in an auction to inject liquidity into the market. South Korea said it wanted crisis talks with Japan and China. Sweden became the latest European Union country to act, with the government saying it would expand bank deposit guarantees and the central bank raising the amount of loans offered to banks. It followed Germany's pledge on Sunday to guarantee private deposit accounts, a move which spurred similar action by Austria and Denmark. Ireland issued the first such guarantee last week. Tensions in Europe resurfaced with some smaller nations angry at being left out of a summit hosted by Sarkozy for Germany, Britain and Italy
