UPDATED: Minister explains deposits guarantee scheme

(Adds explanations made in Parliament)

Finance Minister Tonio Fenech insisted in Parliament this evening that the government guarantee on bank deposits for up to €100,000 was a measure meant to reassure the people, because the local banks were safe and not experiencing any liquidity problems despite the international financial turmoil.

Furthermore, should there be any problems, the government could take various other measures such as re-capitalisation, bank guarantees or even partial or total nationalisation.

He told a press conference, and later repeated in Parliament, that account-holders did not need to worry about fallout from the international financial turmoil because the banks in Malta had enough liquidity and are well capitalised to deal with the situation.

EU Finance Ministers on Tuesday agreed to guarantee deposits for at least €50,000 but the Maltese government, like most EU countries, has decided to give a guarantee up to €100,000.

There are €8.5 billion deposited in local banks.

After Mr Fenech repeated his statement in Parliament, Anglu Farrugia, acting leader of the opposition asked if this statement was a screen for other problems the government was having. Would this be used as a reason for the government not to keep its electoral promises in the budget?

He asked what assets and investment losses had been suffered by local banks abroad. He also asked if there were any signs of difficulties in any of the Maltese banks, large or small.

Charles Mangion, opposition spokesman for finance, confirmed that Maltese depositors need not be alarmed. He asked, however, whether the deposit guarantee also protected those people who had deposited their money in collective schemes or other funds.

He also asked what exposure the Maltese banks had to foreign banks which had collapsed or were in difficulties.

Would the government consider partial nationalisation of the banks, if necessary? After all, what was achieved using taxpayers’ money should belong to taxpayers.

Dr Mangion also asked about the economic impact of the current turmoil, particularly in the services, tourism and export sectors. Furthermore, how could the government go ahead with hiking utility charges and thus reduce Maltese competitiveness in such difficult times? Would the government issue new incentives to help industry and the general public, such as by re-issuing the equity sharing scheme for first-time home buyers?

Replying, Mr Fenech said the unexpected sudden collapse of Lehman Brothers had sparked the 9/11 of the financial services sector, and he therefore was surprised how Dr Farrugia was linking this with the forthcoming budget. Indeed, Dr Mangion and others had spoken of the secondary economic impact expected from the current turmoil.

The Maltese banks had no liquidity problems. They had been hoarding liquidity ever since the first problems cropped up at Northern Rock in the UK and they were continuing business as usual and lending money.

Mr Fenech said the only definite loss of assets was that regarding Lehman Brothers paper held by Bank of Valletta, which was modest. There had also been an impact on individual investments made directly by private investors in Lehman Brothers.

He explained that Malta had opted to raise its deposit guarantee to €100,000 because that was the recommendation agreed at the EU finance ministers’ meeting. Neighbouring countries had also opted for a threshold of €100,000 and had Malta not set the same threshold, one risked having money channelled out of Malta.

The guarantee, the minister said, was on money in the bank, not financial products such as shares or bonds, although investments in banks in Europe still enjoyed guarantee protection by those countries.

The guarantee was a measure of last resort and should there be problems, the government could intervene earlier by providing guarantees to the banks or going for re-capitalisation which in some countries had even meant partial or total nationalisation. Bailing out a bank would be even cheaper than the guarantee. If needs be, the Maltese government would not shirk from nationalising banks.

He could confirm again, however, that no intervention whatsoever was needed for any Maltese bank as their base was on local deposits and their lending was also almost exclusively local.

The local banks were also not involved in inter-banking activity with banks overseas. Nor had they made overseas borrowing for liquidity reasons.

What Malta had to keep an eye on, he said, were the economic consequences of this international turmoil, with economic growth projections being revised downwards across the world. Malta depended on exports, which depended on demand. It also depended on tourism. So it would be foolhardy for anyone to think that there would not an impact on Malta in this area.

He hoped that the reduced rates announced by central banks across the world would be passed on, even in Malta, to economic operators.

Replying to other questions by Dr Mangion, Mr Fenech said the Social Policy Ministry was working on new schemes to help first-time buyers.

As for the utility tariffs, the government had been protecting major industries for years, notably through the capping mechanism which could not be retained any longer because of EU state aid rules.

Mr Fenech said the government had decided to backdate the new power tariffs to October 1 because had it failed to do so, the surcharge mechanism would have had to be renewed, and the new level would have been 160% in view of oil purchase costs.

The government would see how to help industry and hotels to address this challenge by investing to reduce costs, including energy costs.