Germany Drafts Plan to Shield Banking Sector

By Craig Whitlock
Washington Post Foreign Service
Tuesday, October 7, 2008; A01

BERLIN, Oct. 6 -- German lawmakers said Monday that they were drawing up a massive intervention plan to protect the country's financial system as Europe's biggest economy braced for the possibility of more bank failures.

Authorities said they were rushing to finalize details of what they called "Plan B," a contingency measure designed to safeguard the overall German banking sector instead of just propping up banks on the verge of collapse.

Germany's disclosure of the new effort came after an extraordinary Sunday in which Chancellor Angela Merkel announced that the government would guarantee all private bank deposits held by individuals. Officials estimated the sum of such accounts at $800 billion to $1.5 trillion. German banks previously insured individual accounts up to the equivalent of about $27,000.

Although officials declined to provide details, Finance Minister Peer Steinbrueck said in a radio interview that the intent of the new plan is to "try to put an umbrella over all of Germany so we're not mixed up with one case after another." Later, at a news conference, he said that Germany's financial markets remained "highly dangerous" and added: "We are aware that we will not get very far with case-by-case solutions."

The situation reflected a sharp turn of events in Germany, where government and industry alike have long prided themselves on avoiding the kinds of economic risk and instability that plagued the country after World War I. Just 10 days ago, Steinbrueck had declared that Germany's financial sector was "extremely stable" and said the credit crisis was "primarily an American problem."

On Monday, German lawmakers continued to reject the idea of a Europe-wide bank bailout plan that is favored by some of its neighbors and would be similar to the rescue package approved by Congress last week.

Italian Prime Minister Silvio Berlusconi tried to revive a bailout proposal during a meeting with Merkel in Berlin. Before the talks, Berlusconi had said he was confident he could persuade German officials to agree to a plan under which all countries in the European Union would contribute up to 3 percent of their gross domestic products to a rescue fund.

Merkel, however, showed no signs of budging and said only that European countries should take a "coherent" approach by informing one another of their intended actions. Berlusconi told reporters that he would keep pressing the issue but expressed less optimism than he had earlier.

"I have proposed, and I am still convinced it would be the best thing, an umbrella, a common fund for all the 27 European countries, but it's difficult to reach this solution, and we are not there yet," he said.

For days, European leaders have been at loggerheads over whether they should craft a coordinated response to the global credit crisis or let individual countries fend for themselves.

Germany and Britain -- the two biggest economies in Europe -- have insisted that they can take care of their own problems. But the two governments have also groused that they were not consulted about unilateral measures taken by others, such as Ireland's decision last week to guarantee all bank deposits in that country.

Some economists said a Europe-wide bailout fund could be the most effective tool to ease credit problems for the continent's largest banks, which increasingly operate across borders. But Michael Heise, chief economist for Dresdner Bank in Frankfurt, said German politicians were unlikely to agree to a plan under which taxpayer funds might be used to rescue a bank in a neighboring country.

"One of the problems would be that banks might be saved in countries in which the national supervision fell asleep, so to speak, and did not do its job," Heise said. "For that reason, I believe it would not be a good idea to have a bailout fund right now."

On Sunday, German finance officials said they had stitched together a $70 billion bailout for Hypo Real Estate Holding AG, a blue-chip commercial lender that was in danger of failing. A rescue plan announced a week earlier had fallen apart after private banks involved in the deal said Hypo's liabilities were worse than expected.

Hypo officials said that they had been forthcoming about problems on their balance sheet but that credit conditions had worsened in recent days, making it extremely difficult for them to refinance debt. Lawmakers, however, reacted with anger; Steinbrueck, the finance minister, said it was "unthinkable" that Hypo's senior managers would be allowed to keep their jobs.

German officials said their decision to guarantee all personal bank deposits was made to avoid a full-blown financial panic and had nothing to do with Hypo, which has no retail branches and focuses on loans to property developers.

Hypo is only the latest German bank to get into trouble because of shaky real estate investments. In summer 2007, IKB Deutsche Industriebank, which was heavily loaded with U.S. subprime securities, was bailed out by its parent company and a German banking association. Sachsen LB, which was deep into the Irish real estate market, was taken over by another German bank. And earlier this year, a rescue was organized for West LB, a bank that had heavy exposure in the U.S. subprime market.

There were few signs of panic withdrawals on Monday, but many account holders said they were nervously watching developments.

Olaf Wilcken, a 73-year-old retiree from Berlin, said he no longer trusted banks to protect his money.

"The whole economy is in bad shape, thanks to all these super-capitalists or whatever you want to call them," he said. "They have ruined the system for the rest of us."

Dieter Hentschel, 66, a former schoolteacher, said he was leery of the government's promise to insure all accounts.

"No one can guarantee the entire banking and savings system," he said. "But my view is that we shouldn't panic. We should just wait and see what happens. I just hope there are enough intelligent economists working with the government."

According to a poll conducted last week for Der Spiegel, a leading German magazine, less than a quarter of Germans favor a hands-off policy under which the government would allow banks to fail. About 44 percent said the government should nationalize ailing banks, and 22 percent said they should be subsidized with taxpayer funds, according to the survey.

As in the United States, public anger toward the financial industry is growing, with grudging acceptance that only the government can fix the situation.

"The bankers have failed," commentator Carsten Knop wrote in the Frankfurter Allgemeine Zeitung, a leading daily paper. "Now their nerves are raw. And their nervousness and mutual loss of trust are succeeding in destabilizing the system, which they should know best, but which they currently mistrust the most. Only the state can create trust in such a situation, as questionable as that may seem."

Special correspondent Shannon Smiley contributed to this report.