Jeremy Warner: If Brown doesn't act now, he may be forced to later

It's every country for itself, it seems. Less that a day after leaders of Europe's four biggest economies agreed to co-ordinate their response to the growing banking crisis, Germany has unilaterally announced that it is guaranteeing the deposits of all its major banks, action which when taken by Ireland and Greece last week prompted fierce criticism from Germany.

There were few details last night, but Angela Merkel, the German Chancellor, was unambiguous in her comments about underwriting private savers. The situation must have been dire for Ms Merkel to cut across the promise of a co-ordinated European policy response. The European Central Bank is thought to have tackled the crisis well so far, but there is still no centralised treasury function in Europe to stand behind the banking system when it begins to splinter.

Germany appears to be guaranteeing only retail savings, about €568bn, rather than all the liabilities, which are considerably higher. Its actions are therefore not quite as all-encompassing as Ireland's, which has guaranteed all deposits, retail, wholesale and commercial. In fact, Ms Merkel is only making explicit something which has always been implicit, namely that no major European economy is going to allow its depositors to lose money in a banking crisis. Even so, Britain is under intense pressure to follow suit so as to avoid a flight of money into countries where governments have announced a guarantee. The political judgement Mr Brown must make is that if he doesn't act immediately, it's going to look bad if he's later forced into it by a run on the British banking system.

The UK Government may now have no option. If it guaranteed all banking liabilities, the taxpayer would be liable for some £2 trillion of bank deposits, including current accounts, corporate deposits and retail savings. At more than one and a half times annual economic output, this would be a huge and unprecedented contingent liability to add to the country's books. The international composition of most of Britain's leading banks also considerably complicates matters. Would the taxpayer be guaranteeing only the UK liabilities of banks based in Britain, or all their liabilities worldwide? If only the former, it might not necessarily solve the problem, as foreign depositors might continue to withdraw their funds, increasing the risk to the British taxpayer of the UK guarantee.

The UK Government has already come close to making such a guarantee. Only last Friday, Alistair Darling, the Chancellor, said that the deposits of any bank that ran into liquidity difficulties would be guaranteed. An all-embracing guarantee may now be an essential first step to restoring confidence in the system. One plan being studied by the Treasury is for the Government to take stakes in UK banks in return for helping them. This might also contribute to the process of recapitalisation of the banking system, another precursor to the restoration of confidence.

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