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Germany's bank bailout has failed, MPs say

Section: Daily Dispatches

By Bertrand Benoit and James Wilson
Financial Times, London
Friday, December 12, 2008

Germany's banking sector rescue has failed and should be modified urgently if lasting damage to the economy is to be avoided, the MPs who oversee the E500 billion ($668 billion, L449 billion) of funds warned on Friday.

In a letter to Peer Steinbrück, the finance minister, obtained by the Financial Times, the MPs said a E400 billion fund set up by the government to guarantee bank debt had not led to a resumption of inter-bank lending and that German banks were not providing companies with sufficient credit.

In addition to the E400 billion fund, the bailout also includes E80 billion for capital injections and E20 billion for the purchase of so-called "toxic assets."

The MPs' appeal will add to pressure on Angela Merkel, chancellor, to reconsider her government's financial markets stabilisation fund.

The appeal may also add to international doubts about Germany's handling of the financial crisis in the week that Mr Steinbrück harshly criticised the British economic strategy.

"Although ... we can expect that [the E400 billion in guarantees] will have been used up in the near future, there is serious concern that the expected revival of the inter-bank lending market will not take place," Albert Rupprecht, chairman of the parliament's financial markets committee, wrote to the finance minister.

Speaking to the FT in a telephone interview, Mr Rupprecht said: "The expectation that stabilising a few financial institutions would kickstart interbank lending has not materialised. I fear the debt guarantees could soon be exhausted without this having happened."

Soffin, the body set up to run the financial sector rescue fund, said on Friday that it had approved "E90 billion of guarantees to Commerzbank, BayernLB, HSH Nordbank, and Hypo Real Estate, and was considering requests from 11 other banks. It said it believed it had enough margin to cover all requests.

Ms Merkel is known to be concerned about the availability of credit after receiving alarming reports that long-term investment in sectors ranging from shipbuilding to renewable energy was being being put on hold due to the absence of funding. Although small and mid-sized companies are still obtaining day-to-day financing from savings and co-operative banks, lending for larger projects has dried up.

The issue is likely to come up at a meeting at the chancellery on Sunday where Ms Merkel will discuss the state of the economy with cabinet ministers, economists, banking representatives, and business and union leaders.

Mr Rupprecht urged Mr Steinbrück to consider setting up a central clearinghouse for interbank lending, whereby banks would lend to a government-managed body that would in turn provide short-term financing to other banks. The Bundesbank, which co-manages the stabilisation fund with the finance ministry, is known to be considering creating such a clearinghouse.

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