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The Danish government said this morning it has guaranteed all private bank deposits in Denmark as part of a deal with banks to set up a 35 billion Danish crown (€4.7 billion) liquidation fund.

Until now, deposits in Danish banks had been guaranteed up to 300,000 crowns (€40,000).

In return for the government guarantee, banks agreed to pay up to 35 billion crowns over two years in a liquidation fund that could take over distressed institutions to avoid losses to depositors and certain creditors.

"Practically, the Danish state has sold insurance to the financial sector," Lene Espersen, the minister for economic and business affairs, said at a news conference shortly after midnight. "The sector pays a deductible of 10 billion crowns and a premium of 15 billion crowns over two years, which can be increased by another 10 billion crowns if necessary."

Ms Espersen said the fund amounts to 2 per cent of Denmark's gross domestic product. The deal can be prolonged after two years, if necessary.

She said the government did not want to take over banks and would use the fund to deal with any distressed institutions on a case-by-case basis to sell or liquidate them, with shareholders being the first who stand to lose.

"The financial crisis has caused banks in Denmark and abroad to not lend to one another, which does not reflect the real economic situation in Denmark," finance minister Lars Lokke Rasmussen said at the news conference. "With this deal we make a targeted effort to get the financial markets to function well again."

All political parties represented in the Danish parliament approved the deal except two far left parties.