Bailout for German Banks
October 13, 2008
The package assumes that 5 percent of a federal guarantee will ultimately be lost, according to provisions of the legislation leaked Monday to German news agency dpa.
The legislation, therefore authorizes the Finance Ministry to borrow funds to the value of the 5 percent -- some 20 billion euros -- to counter-balance that eventuality.
Chancellor Angela Merkel was expected to announce Germany's role in the coordinated European rescue at a 3 pm news conference, with her finance minister to issue details half an hour later.
Banks rescued
A state fund -- the German Financial Market Stabilization Fund -- would be set up to inject 80 billions euros into German banks and purchase their troubled assets.
The ministry would be authorized to borrow 70 billion euros for that fund. That sum is about 50 percent more than the stabilization fund announced Monday in London for leading British banks.
Setting up the fund will increase Germany's net public borrowing, but the bill states that, initially, none of the money will be budgeted as federal expenditure.
The new fund will offer to take over tainted securities, mainly derivatives, provided they were on the banks' books as of Monday. The time limit prevents the banks from buying junk securities and passing them on to the German government at a higher price.
The fund will have leeway to grow by an additional 10 billion euros if need be.
The banks would be required to show they were pursuing "careful" business plans and the government would have power to set caps on pay for their executives and supervisory boards.
In addition the draft bill authorizes the German state to guarantee interbank trading.
Loan guarantees
The Finance Ministry would have the power to extend guarantees totalling 400 billion euros up to December 31, 2009.
Banks would have to pay a fee of 2 percent per annum for such guarantees.
Sources said Merkel and the two leading Social Democrats in her coalition government, Finance Minister Peer Steinbrueck and Foreign Minister Frank-Walter Steinmeier, agreed in the night on the basics of the plan.
The cabinet was to meet Monday, with the pro-Merkel parties, which have an overwhelming majority in the Bundestag lower chamber, expected to move the legislation Tuesday. Passage by Saturday is feasible if there is no opposition.
Package still criticized
Signs were emerging Monday of criticism of the terms of the rescue, which follows a 50-million-euro mixed public-private bail-out last week for German mortgage lender Hypo Real Estate.
One Christian Democratic Union (CDU) state premier, Peter Mueller of Saarland state, welcomed the package, but said he favoured a cap on state aid to the banks. "Banks that have misbehaved on the markets should be held responsible for it," he said.
Others criticized finance minister Steinbrueck for apparently abandoning plans to balance the German federal budget by 2011.
Guenther Oettinger, the CDU premier of Baden-Wuerttemberg state, said, "A brake on public debt is just as necessary, even more necessary in the future."
The mass-circulation newspaper Bild had quoted Steinbrueck as saying, "We'll keep our target of balancing the budget in mind, but it's going to take longer now."
Opposition parties were expected to demand the imposition of tougher conditions on the banks to be rescued.
On N-TV television, Greens co-leader Reinhard Buetikofer, said, "The government can't expect to be given a blank cheque."