Germany clinches agreement on 'bad bank' scheme
The plan, which has become somewhat of a political hot potato five months before a national election, would allow banks to park their toxic assets in specially-created institutions for up to 20 years.Berlin -- The German government agreed a "bad bank" scheme on Wednesday to clean up toxic assets from bank balance sheets, a key plank of Berlin's bid to turn around the economy, a spokesman said.
The plan, which has become somewhat of a political hot potato five months before a national election, would allow banks to park their toxic assets in specially-created institutions for up to 20 years.
Berlin hopes that removal of these bad holdings from balance sheets will encourage banks to lend to each other, to businesses and consumers.
This in turn would help kick-start the economy, the biggest in Europe, which is expected to shrink six percent this year.
Finance Minister Peer Steinbrueck told reporters it was a "necessary operation."
He said that "if we do not do something ... if we do not try to solve this problem, then we would have worse problems," and stressed: "We must act."
Chancellor Angela Merkel's chief of staff Thomas de Maiziere said: "In the interests of the real economy, we are buying time so that the so-called toxic assets can be cleared up."
With the election looming, politicians have been torn between the urgent economic need to revive Germany's troubled banking sector and the political desire not to saddle taxpaying voters with a huge bank bailout bill.
Steinbrueck said the plan would "relieve the taxpayer as much as possible."
After the 20-year period, the value of these assets will be assessed with the banks' shareholders picking up the tab if they have not gained in value.
Banks "remain responsible" for their toxic assets -- mainly complex financial products based on now worthless "subprime" American real estate holdings -- Steinbrueck insisted.
He estimated that the total value of such assets in Germany was "180 to 190 billion euros" (245 to 259 billion dollars).
Andreas Schmitz, from the federation of German private banks, said the scheme was akin to "a huge deep-freeze in which each bank will have a shelf."
"Their problem assets will be stored there and frozen. After the crisis, we will see if the merchandise can still be sold," he said.
However, Christoph Schalast, a professor from the school of finance and management in Frankfurt criticised the scheme, describing it as a "bad compromise."
"On the one hand you want to kick-start the credit markets but you want to do it in such a way that the taxpayer pays almost nothing. These two objectives seem to me to be difficult to reconcile," he said.
Berlin's plan follows a slightly different model than efforts in other countries to relieve banks of their toxic assets.
In Ireland, the government has set up a single government-backed "bad bank" into which its troubled financial institutions can pour their distressed assets.
Washington has opted for a different model, encouraging private investors to buy up the troubled assets alongside the taxpayer.
The International Monetary Fund has said that clearing up toxic assets from banks' balance sheet is the top priority for policymakers seeking to drag the global economy from its worst downturn since the Great Depression in the 1930s.