French President Nicolas Sarkozy has blamed the Irish banks guarantee for an international financial crisis in which money flows from country to country depending on who is offering the best deal.

He said the Republic's Finance Minister Brian Lenihan's €500bn scheme, covering 11 banks in southern Ireland, has resulted in a total loss of liquidity in the City of London as all the cash flowed to guaranteed banks in Ireland.

Mr Sarkozy said the resulting crisis was serious, but added that, in referring to the Irish guarantee, he was not making a value judgment.

While Ireland was first out of the traps to offer a rescue scheme for ailing banks, the move was quickly replicated across Europe and in the US, as governments offered various deals to protect their financial institutions.

"I believe the crisis calls upon us to reform the European institutions," Mr Sarkozy said, adding that it was important to make "as rapid a response as possible".

He said that as European President, he and others would "work on a road map to see how we can deal with the Irish problem".

Last night a spokesman for the Republic's Department of Finance defended the €500bn package, saying: "The decision made by the Irish Government was the correct thing to do given the circumstances."

The spokesman acknowledged the need to promote stability in Europe and said the Government was supporting President Sarkozy in his efforts to bring that about. A director of the European Central Bank last night also backed the Irish scheme in the wake of Mr Sarkozy's comments.

Jose Manuel Gonzalez Paramo told RTE that Ireland's banks guarantee complies with the EU's approach for dealing with market turmoil.

After the Government approved the €500bn guarantee three weeks ago, other European governments were quick to follow suit with various rescue plans for their own financial institutions.

Germany approved a package worth up to €500bn, France will spend about €350bn and Spain has set aside €100bn.

The bulk of this money will be used to guarantee lending between banks. The cash injection move by France, Germany and Spain was echoed by Austria and Italy.

The UK government has said it will inject up to £37bn of taxpayers cash into Royal Bank of Scotland, Lloyds TSB and HBOS while the Irish deal is a guarantee package, which will cost the banks €1bn and does not involve taxpayers' money.

Mr Sarkozy vowed yesterday the European Union would work to enlist emerging Asian economic giants China and India, themselves potential investors in Europe via wealth funds or corporations, in a summit next month to reform the world's financial system.

Belfast Telegraph