German 'bad bank' plan: an election headache for Merkel

20th April 2009, Comments 0 comments

Politicians are torn between the urgent need to prop up Germany's beleaguered banking sector and the desire not to anger voters with a bank bailout only five months before a general election in Europe's biggest economy.

Berlin -- German Chancellor Angela Merkel will hold a crunch meeting Tuesday to thrash out a plan to remove "toxic" assets from banks -- an issue that has become a political hot potato with an election looming.

Politicians are torn between the urgent need to prop up Germany's beleaguered banking sector and the desire not to anger voters with a bank bailout only five months before a general election in Europe's biggest economy.

According to some estimates, German banks are stuck with around 300 billion euros (392 billion dollars) of "toxic" assets on their books -- assets that are either worthless or cannot be sold easily in the current market climate.

Weighed down by these bad holdings, banks have become reluctant to lend money to consumers and businesses, depressing the German economy, which is facing its worst recession in six decades.

The solution proposed by Finance Minister Peer Steinbrueck is to allow banks to create their own individual "bad banks" to park these assets.

Steinbrueck's plan distinguishes between toxic or worthless assets and "illiquid" assets, which banks are finding difficult to sell in today's clogged-up markets but which could eventually rise again in value.

For toxic assets, "individual banks and shareholders must take most of the responsibility," Steinbrueck told the Frankfurter Allgemeine Sonntagszeitung in a recent interview.

However, under Steinbrueck's plan, the taxpayer would cover the banks for "illiquid" assets, taking any losses eventually made on these assets, but also reaping any possible profits if the assets gain in value.

"This could eventually help the state out, because we assume that the bonds issued by the government as well as by companies will one day become liquid again, so their value is not lost forever," Steinbrueck said.

The concept of a single "bad bank" to cover all the toxic assets in Germany -- the solution favoured by many of the country's banks -- has been "definitively" ruled out, Steinbrueck said.

Merkel, who has taken personal charge of the scheme, has invited Steinbrueck to Tuesday's meeting, along with Frank-Walter Steinmeier, her rival in September's election, and Axel Weber, head of the German central bank, or Bundesbank.

Berlin has played down expectations for a quick result from the meeting, with deputy government spokesman Thomas Steg telling a regular briefing Wednesday: "We have always made clear we expect no conclusive results."

Nevertheless, Steg stressed the government would be working "flat out" on the issue, which Merkel believes is now her "chief priority."

But despite the urgency, the task of coming up with an appropriate solution has been made harder by political wrangling within Germany's "Grand Coalition" government.

Members of the CSU party, sister party of Merkel's conservative CDU group, have criticised the proposals from Steinbrueck, himself a member of the centre-left Social Democrats.

One senior CSU politician, Peter Ramsauer, dismissed the scheme as "the cleverest way of covering up the economic facts."

Another conservative source said there would likely be further wrangling over how to define "illiquid" and "toxic" assets.

"Who is going to be in charge of making this distinction? The banks or the state? And according to what criteria? This is not at all clear," the source told AFP.

AFP/Expatica

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