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Business

Banks Need State Aid to Avoid Worst of Credit Crisis, Merkel Says

Chancellor Angela Merkel sought backing Sunday from skeptical Germans for a costly bank rescue plan. Berlin's bail-out package could cost German taxpayers billions of euros.

Chancellor Angela Merkel

Merkel is attending an emergency summit of euro-zone leaders in Paris

In remarks to a Sunday newspaper, Bild am Sonntag, Merkel said, "Only action by the state can restore necessary confidence now."

Before a meeting Sunday, Oct. 12, in Paris of the 15 euro zone leaders, she said that the intervention had to be internationally coordinated.

"We are not doing this for the sake of the banks but in the interests of the people," she told the mass-market Bild.

As in the United States, the German left has grumbled at a rescue likely to cost tens of billions of euros, saying it comes only a few years after a reduction in the scale of welfare handouts to the German poor.

Though she called Sunday's euro-zone meeting important to bring a return of confidence in European markets, Merkel reiterated her opposition to a joint bail-out by the euro zone, saying each country must deal with its own troubles.

"This meeting is to decide on coordinated joint action in the euro zone so that every country in the coming days can put in place measures that stabilize the financial markets," Merkel told reporters as she arrived for the meeting at the Elysee presidential palace.

Four of the G7 nations which set out the broad direction of the plan on Friday in Washington will be represented at the 16-nation Paris summit, which will embrace Britain although the British do not use the euro currency.

Four-point rescue plan

A life buoy sits at the bank of the river Spree in front of the Reichstag

The bailout is rumored to include an option of partially nationalizing banks

A week ago Berlin put together a 50-billion-euro rescue of Hypo Real Estate, the country's fourth biggest bank, but this took the form of guaranteeing badly needed credit lines rather than the state taking a stake in the stricken commercial property lender.

After a severe deterioration of German banks' liquidity shortages, as markets have tumbled in the past week and short-term lending among banks has become even more difficult to come by, has forced policy reversal in Berlin.

Merkel has not detailed Berlin's actions and the finance ministry said information about the plans would be announced Monday at the earliest, but sources in Berlin told German news agency dpa they would comprise four elements.

One would be a government guarantee to encourage the German banks to lend one another money. Many were nervously parking money at tiny rates of interest with the central banks at the end of last week rather than lending it where it is needed.

Reviving inter-bank lending would allow credit to resume flowing into the wider economy.

A second part would be copied from the $700 billion (522 billion euro) US bail-out, with toxic assets at the banks, such as investment certificates based on worthless real estate, being shifted to a so- called bad bank, which would buy the assets with taxpayer money.

The curve of the German DAX drops

Falling stock prices across Europe played a role in Germany's policy re-think

A third element would be to recapitalize the banks, which have exhausted most of their shareholder funds as they write off vast quantities of worthless debt.

Britain has already made that move, saying last week it will invest at least 50 billion pounds ($87 billion, 63.7 billion euros) to recapitalize eight or more banks including Barclays and Royal Bank of Scotland Group. The government could sell the stakes again later.

Tough rules expected for nationalized banks

Bild as well as weekly Welt am Sonntag reported Sunday that the worst hit institutions are not private German banks but the Landebanks, the regional lending powerhouses that are owned by Germany's 16 states.

Merkel also committed herself in a statement to parliament on Tuesday to alter accounting rules, as the US Congress has just done, so that tainted assets can be taken off bank balance sheets in all the European Union nations.

The online version of German business daily Handelsblatt said Berlin was likely to dictate some strict terms to the banks for rescuing them.

The banks would be required to reform their business models and make fundamental changes to executive pay, altering the incentive systems and retirement bonuses that have prompted accusations that bank chiefs are greedy.

The German legislation is likely to be discussed Monday in Merkel's Cabinet before it is sent to parliament.

Merkel leads a grand coalition between her own Christian Democrats and the German Social Democrats, which can comfortably pass any legislation. The key debates are therefore likely to take place in the two parties' caucuses before the issue is put to vote.

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