Oct. 6 (Bloomberg) -- Denmark guaranteed all bank deposits in an agreement funded by the country's commercial lenders, becoming the latest European nation to bolster the stability of its financial markets.

Commercial banks will provide as much as 35 billion kroner ($6.4 billion) over the next two years to a fund to insure depositors against losses, the Copenhagen-based Economy Ministry said in a statement on its Web site today. The sum is equivalent to 2 percent of gross domestic product and the government sought an accord that didn't burden taxpayers, the ministry said.

``If we didn't act now making this agreement with the private sector, we could end up with a whole lot of financial institutions in trouble,'' Lene Espersen, the minister for the economy and business affairs, said in a telephone interview. ``The small banks are completely dependent on having a money market that's working and it isn't at the moment.''

Six regional banks in Denmark have been bailed out, bought, or put up for sale in the past month. More small banks may fail within a year, 39 of 45 economists said in a poll published on Oct. 2 by newswires RB-Borsen and Ritzau. Elsewhere, the U.S. will spend $700 billion repurchasing assets from troubled banks and European leaders are seeking an accord to limit the economic fallout of the credit crisis.

BNP Paribas SA will take control of Fortis's units in Belgium and Luxembourg after government efforts to ensure the company's stability failed, while Germany's government and financial institutions agreed on a $68 billion rescue for Hypo Real Estate Holding AG.

Rising Rates

Denmark's benchmark intra-bank lending rate, the three- month CIBOR, rose to a seven-year high of 5.5667 percent on Oct. 2.

``The financial crisis means that banks won't lend to each other,'' Finance Minister Lars Loekke Rasmussen said in the statement. ``This is not linked to the fundamental economic situation in Denmark.''

Under the agreement, the banks won't be allowed to pay dividends to shareholders, buy back their own shares or form new stock option plans for their management.

The sector will immediately pay 10 billion kroner to the guarantee fond and provide an annual commission of 7.5 billion kroner. If needed, the banks will increase the total amount by 10 billion kroner.

A Shield

``The control unit, which monitors the financial system, will be given more resources to make sure that nobody can misuse this state guarantee to do more risky business,'' said Espersen, who's also Denmark's deputy prime minister.

Danske Bank A/S, the country's biggest lender, said it will cover about one third of the costs related to the accord. Nordea Bank AB, the Nordic region's biggest bank, which is the second- biggest operator in Denmark, will pay about a fifth.

``This will put up a shield protecting Denmark against the international crisis,'' Peter Straarup, chief executive officer at Copenhagen-based Danske Bank, said in a telephone interview. ``If the crisis resolves itself within a month, this guarantee will have been very expensive, but if it deepens or continues, it will be of much value to the sector.''

Before today's accord, the ceiling on deposit guarantees had been set at 300,000 kroner.

To contact the reporters on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net; Tasneem Brogger in Copenhagen at at tbrogger@bloomberg.net.

Last Updated: October 6, 2008 09:49 EDT