Thursday, 14 February 2008

crisis meeting came as rumours of hefty losses in German banks rocked the credit markets. Munich lender BayernLB admitted yesterday to losses of almost €1.9bn stemming from US sub-prime and the stock market slide - lower than claims among traders.
Germany faced its "Northern Rock moment" last night as top ministers and bankers thrashed out a rescue plan to save IKB Deutsche Industrie Bank, fearing a "bank tsunami' if the struggling lender was allowed to fail.
Politicians agreed to a €1.5bn (£1.11bn) taxpayer bail-out of the state-controlled bank as escalating losses from US sub-prime threatened to set off a confidence crisis, despite the failure of earlier cash infusions worth €6bn since July. A third of the new money will come from banks and private investors.
Finance minister: Peer Steinbrueck said failure of IKB "had to be prevented"
The debacle has threatened to drag down its much bigger sister-bank KfW, which holds a 38pc stake and is itself in distress. "We must be careful lest an IKB crisis turns into an KfW crisis," said Jurgen Koppelin, a KfW board memberIt unclear whether new money will be enough to stabilise the bank. It has unearthed a further €2bn in losses since the New Year. "The risk is that it may require much more money but IKB has to be saved or we could face a banking tsunami," said Mr Koppelin. The bank needs €500m immediately to stave off likely collapse.The emergency move by Berlin recalls actions by the UK authorities in September, when Northern Rock's meltdown risked toppling dominoes across the mortgage banking industry.Finance minister Peer Steinbrueck said a failure of IKB would have "widespread" knock-on effects for the banking system and had to be prevented. "It could create difficulties for confidence and economic growth," he said.

German banks have borrowed heavily from the European Central Bank's liquidity window, taking up 46pc of the total €430bn in December, although they account for just 26pc of the eurozone's asset base. The confidential data was revealed this week by Spain's government, irked by reports that Spanish banks have been on an ECB drip-feed.The escalating credit crisis in Europe comes amid ever clearer signs of an economic downturn. Industrial production in the eurozone fell 0.2pc in December, with a plunge of 4pc in Italy.Merrill Lynch's monthly survey of fund managers showed that the mood in Europe is now more pessimistic than during the depths of the dotcom crash. A majority think the ECB has tightened too hard, setting the stage for a hard-landing. More than 30pc have taken out hedge protection against a stockmarket slide over the next three months. "The four-year love affair with European equities is now at an end," said the report.Standard & Poor's warned yesterday of soaring default rates in pockets of Europe's credit system. Some 8.3pc of all loans taken out for leveraged buy-outs are already in default or have breached their covenants, typically because the ratio of cash flow to debt has fallen below safe levels. It warned that half of all LBO debt in Europe could default.
In Berlin, a growing chorus has called for the resignation of Ingrid Matthaus-Maier, KfW's board chief and a Social-Democrat politician. "She must be held accountable for botched crisis management and should step down," said Michael Fuchs, chair of the Bundestag's finance committee. He said it was astonishing that we still do not know the full extent of IKB's losses six months after the crisis erupted in August.
KfW has already lost €5bn since August propping up IKB, bearing the brunt of the rescue costs. It is now trying to sell its stake altogether.



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