German government mulls bad bank option for cleanup

Agence France-Presse

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

Berlin's efforts to clean up the country's banking system and free its banks to begin lending again follows similar plans around the world, notably in the United States, Britain and Ireland.

According to finance ministry estimates reported yesterday by the Frankfurter Allgemeine Zeitung daily, German banks have as much as 853 billion euros ($1.1 trillion) of toxic assets on their books that are either worthless or can not be sold easily in the current depressed 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.

Urgent task
International Monetary Fund chief Dominique Strauss-Kahn said Monday that cleaning up banks' balance sheets was a more urgent task than injecting cash into the economy with stimulus packages and slammed 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 - presented at the meeting by Finance Minister Peer Steinbrueck - is to allow banks to park toxic assets in their own individual mini "bad banks."

The idea of creating a single "bad bank" as a dumping ground for all toxic holdings in Germany has been ruled out, 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 gain in value later on.

"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.