Germany mulls 'bad bank' options

22nd April 2009, Comments 0 comments

Politicians are torn between the urgent economic need to remove 'toxic assets' from Germany's troubled banking sector and the political desire not to anger taxpayers with a bank bailout five months before the national poll.

Berlin -- German Chancellor Angela Merkel held a crunch meeting Tuesday with officials to thrash out a plan to clean up banks' balance sheets, an issue that has become a political headache as an election looms.

Politicians are torn between the urgent economic need to remove "toxic assets" from Germany's troubled banking sector and the political desire not to anger taxpayers with a bank bailout five months before the national poll.

According to finance ministry estimates reported Tuesday by the Frankfurter Allgemeine Zeitung, German banks have as much as 853 billion euros (1.1 trillion dollars) of toxic assets on their books 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 since World War II.

International Monetary Fund chief Dominique Strauss-Kahn said Monday that cleaning up the balance sheets of banks was a more urgent task than injecting cash into the economy with stimulus packages and criticised governments for acting too slowly.

"In Germany, other European countries or in the United States, everywhere we are being too slow to deal with this topic," Strauss-Kahn said in an interview with the Handelsblatt business daily.

The proposed solution -- which Finance Minister Peer Steinbrueck will present at the meeting-- is to allow banks to dump their toxic assets in their own individual mini "bad banks."

The idea of creating a single "bad bank" for all the toxic holdings in Germany has been effectively ruled out, government officials have said.

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

For toxic assets, "individual banks and shareholders must take most of the responsibility," Steinbrueck said recently.

However, the taxpayer would provide a guarantee for the "illiquid" assets, taking any losses that arise but also reaping the profits if the assets should eventually 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.

According to the Frankfurter Allgemeine Zeitung, the plan will mainly concern Germany's Landesbanken -- state-owned, regional banks that nonetheless play a vital role in the economy.

Bigger commercial banks, such as Deutsche Bank, have already signalled they will not take part in the scheme, the finance ministry proposal said, according to the newspaper.

Tuesday's meeting, attended by Steinbrueck, as well as Frank-Walter Steinmeier, Merkel's rival for power in the September 27 election, will not produce concrete decisions but will "set the direction," officials have said.

The government hopes to come up with a solution by early July when politics normally slows down for the summer break.

But this July, politicians will be gearing up for elections and the "bad bank" plan has already been beset by political wrangling within Germany's uneasy "grand coalition" government.

One senior member of the CSU party, sister party of Merkel's conservative CDU group, dismissed Steinbrueck's plan as "the cleverest way of covering up the economic facts."

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

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

Richard Carter/AFP/Expatica

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