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Subprime Fallout

German Banks Could Hemorrhage 70 Billion Euros

The fallout in Germany from exposure to America's subprime crisis may turn out to be far bigger than previously feared. One major newspaper is putting estimated losses at a whopping 70 billion euros, while a prominent politician warns that the US recession has already arrived in Germany.

German banking executives fear the current financial crisis is quickly shaping up to be the worst since 1929. In its Friday edition, mass-circulation daily Bild newspaper cites banking insiders who predict that total losses at German banks from the American subprime mortgage loan crisis could hit the €70-billion ($111 billion) mark.

The paper reports that Germany's banking supervisory authority BaFin has calculated the total volume of high-risk investments made by the country's banks. "Now we have an overview of what's going on," a BaFin spokeswoman told the newspaper. "The figures are reliable." The agency, however, is keeping the data classified.

On Friday, Bavarian governor Günther Beckstein said the state's BayernLB bank would announce losses related to the credit crisis of up to €4 billion -- double the €1.9 billion figure the bank had previously disclosed. The announcement is sure to place additional pressure on government figures in the state who have been accused of trying to play down the magnitude of the bank's red ink flow.

Bild also reports it has obtained information suggesting that state-led bailouts will continue for German banks hit hardest by the subprime crisis. The paper claims that the country's third-largest regional bank, WestLB -- which has been kept alive with injections from the state of North Rhine-Westphalia -- will soon be requiring an additional €2-billion lifeline. Meanwhile, IKB Deutsche Industriebank AG bank,which has already received a billion-euro bailout, will be draining a further billion euros from the public purse, bringing its total rescue package so far to €8 billion. Globally, the Bank for International Settlements is reporting that banks had already written off losses to the tune of €150 billion by the end of January.

"The American recession will definitely arrive," Michael Fuchs, an economics expert for the conservative Christian Democrats (CDU), told Bild. "It's already virtually here."

Not so fast, argues German Economics Minister Michael Glos, who belongs to the CDU's Bavarian sister party, the Christian Social Union. He feels there's nothing to suggest the recession has already hit: The supply of credit is strong and the government's forecast for GDP growth in 2008, to be announced April 24, remains at 1.7 percent.

If the US subprime crisis does indeed deliver the feared slump to Europe, he told the financial daily Handelsblatt, his Economics Ministry was prepared to present plans to mitigate the impact of a recession, including tax relief for mid- to low-income groups. Glos said the state should take advantage of any financial room for maneuver at its disposal in order to lower taxes.

However his calls are driving a wedge between the two partners in Germany's grand coalition government, which is a power-sharing agreement between the Christian Democrats and the center-left Social Democrats (SPD).

German Finance Minister Peer Steinbrück of the SPD promptly rejected any calls for tax cuts. According to Reuters, Finance Ministry spokesman Torsten Albig said: "There will not be any additional tax cuts during this legislative period," which will not end until after national elections in 2009.

Meanwhile, the free-market liberals, the Free Democratic Party, have called on Glos to follow up on his words with action, with the party's deputy chief, Rainer Brüderle, noting that "low taxes make the best economic policy."

nmb/reuters