Rescue for German bank aims to avoid crisis in confidence

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, February 14, 2008

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/mone...

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 E1.5 billion (L 1.11 billion) taxpayer bailout 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 E6 billion since July. A third of the new money will come from banks and private investors.

The debacle has threatened to drag down its much bigger sister bank, KfW, which holds a 38 percent 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 member.

It unclear whether new money will be enough to stabilise the bank. It has unearthed a further E2 billion 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 E500 million 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" effects for the banking system and had to be prevented. "It could create difficulties for confidence and economic growth," he said.

The crisis meeting came as rumours of hefty losses in other German banks rocked the credit markets. Munich lender BayernLB admitted yesterday to losses of almost E1.9 billion stemming from US sub-prime and the stock market slide -- lower than claims among traders.

German banks have borrowed heavily from the European Central Bank's liquidity window, taking up 46 percent of the total E430 billion in December, although they account for just 26 percent 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 0.2 percent in December, with a plunge of 4 percent 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 dot-com crash. A majority think that the ECB has tightened too hard, setting the stage for a hard landing. More than 30 percent have taken out hedge protection against a stock market 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 8.3 percent of all loans taken out for leveraged buyouts 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 Democratic 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 E5 billion 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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