By FT reporters

European governments have so far announced spending of nearly €200bn ($268bn, £157bn) on arms-length vehicles to inject funds into banks and a further €1,250bn in guarantees of bank funding, with more to come, raising fears that the financial crisis will land a huge blow to Europe’s public finances.

There is no doubt that taxpayers could be saddled with huge debts for years. But European policymakers say they have introduced the measures to protect taxpayers from genuine losses that would have arisen had the financial system collapsed.

Christine Lagarde, French finance minister, could have been speaking for all ministers when she said on Monday that “there will be no cost and there will even be benefits for the state”.

The eventual costs and benefits for taxpayers will be determined by the success of the schemes in shoring up the financial system but they are also affected by arcane common rules for public finance accounting.

Buying preference shares or common stock in a bank is considered a financial transaction, rather than the purchase of goods or services, even though governments will borrow hundreds of billions to fund the capital injections, and these will not raise public deficits.

In addition, some eurozone countries do not expect to use the funds available for recapitalising banks. The Netherlands finance ministry, for example, says it does not expect its €20bn fund to be widely used. “The purpose of the system is to increase confidence,” it says.

But because the issuance of government bonds will increase, measured public sector debt will rise in many European countries.

In France, public debt is predicted to hit 65.3 per cent of gross domestic product in 2008 and 66 per cent next year. If the €40bn earmarked for bank recapitalisation were all taken up, this would add 2 percentage points of GDP to the debt figure. In Britain, £50bn of capital injections would raise public sector net debt by more than 3 per cent of GDP.

But any additional interest payable on the debt is likely to be more than offset with higher payments by banks through coupons on preference shares and dividends on common stock, so taxpayers are likely to gain.

The guarantees are easier to account for since they count on government books only if they are called, which ministers expect not to happen. Otherwise they classify as contingent liabilities.

For all this relatively good news for taxpayers, who now have huge potential liabilities alongside reasonable expectations of small gains from fees charged to banks, there is little doubt public finances across Europe will deteriorate rapidly because of a slowing economy.

Speaking about Britain, Ben Broadbent of Goldman Sachs says: “The cost [of the rescue] is a fraction of the damage the slowdown is already doing directly to the public finances and an even smaller fraction of what would have happened to public-sector debt issuance without a scheme.” Economists expect the UK deficit to rise to about 6 per cent of GDP in 2009-10 and 2010-11.

Gilles Moec, European economist at Bank of America, says France and Italy will also adopt stimulative budgetary policies to head-off the worst effects of looming recessions. “This could bring the deficit to 4 per cent of GDP in 2009 in France and 3.2 per cent in Italy.”

Even if the government rescues do not break European limits on deficit and debt, the slowdown will keep the scrutiny on weakening public finances for years.