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Germany

Financial Crisis Merkel's Greatest Challenge, Experts Say

Estimates of the cost to the German taxpayer of rescuing banks still varied wildly, with high-end guesses coming in at 400 billion euros. The government said it would announce details of the bailout on Monday.

German Chancellor Angela Merkel

Merkel is leading Germany through its biggest challenge since reunification, some said

The highest estimate of 400 billion euros ($550 billion) was made by Otto Fricke of the opposition free-market liberal FDP who chairs the Bundestag budget committee, in an interview with a Cologne newspaper, the Koelner Stadt-Anzeiger on Monday, Oct. 13.

Members of Chancellor Angela Merkel's Christian Democratic Union (CDU) were tighter in their estimates. They said that if the government's cash injections were lost and all the guarantees were called, the bill would total 250 billion euros.

That is roughly the same as Germany's entire annual budget this year of 283.2 billion euros.

Merkel's staff repeatedly insisted to Berlin reporters over the weekend that it was still to early to guess at the cost to the budget.

"All the numbers are just made up," they said as government officials worked all weekend on the emergency plan that was discussed at a meeting of euro zone leaders in Paris on Sunday.

Merkel's greatest challenge

The Frankfurt skyline behind a road construction sign

There is much work to be done at European financial centers, like Frankfurt

Merkel promised clarity about the rescue package's proposals on Monday after she met with Cabinet ministers in Berlin. Politicians -- and investors -- are hoping for a comprehensive answer to the global financial crisis.

"Germany's economy has not faced a challenge on this scale since the reunification of East and West Germany in 1990," said Steffen Kampeter, the CDU's budget spokesman.

Merkel aides spoke of the worst crisis of her chancellorship, which began in 2005, and the prospect of emergency legislation being rushed through Germany's normally staid parliament undermined that impression.

The chancellor also began preparing German public opinion for the bleak news that she is expected to deliver Monday.

"Only action by the state can restore necessary confidence now," she told mass-market weekly Bild am Sonntag. "We are not doing this for the sake of the banks but in the interest of the people."

Berlin's decision to issue a bank bailout marked a major change from her stance only last Tuesday, when she called the situation serious and unpredictable in a speech to parliament, but gave no hint she had a broad rescue in mind.

At that point she spoke of just one rescue, for German mortgage lender Hypo Real Estate, with the implication that one more bailout at the most would see the crisis out.

Germany's fading optimism

Merkel and Steinbrueck at a press conference

Merkel and Steinbrueck had hoped Germany would escape the worst of the credit crunch

Merkel and her Social Democratic Finance Minister Peer Steinbrueck seemed optimistic at that point that the world's governments had taken adequate action.

But then the stock markets around the world plunged. Not even coordinated global interest rate cuts buoyed markets for long. Billions of dollars in market capitalization vanished, and banks refused to lend one another money.


Germany's main fear at first was that the panic would spread to private depositors and that they would withdraw their money from the banks. The political assurance a week ago that not one euro in a German savings, current or term account would be lost could prove enormously costly to the government.

Additionally, the state is about to guarantee interbank lending to get the flow of credit moving again.

Berlin is also expected to alter accounting rules so that banks can remove tainted assets from the balance sheets, where these toxic loans are eating away at shareholders' equity.

It also seems likely Berlin will inject equity into some of the banks as Britain did last week. That will cost money upfront, but the investment could be recovered for the budget later if the banks trade back into the black.

Ultimately, experts have said, Germany may not know the true cost of the rescue program for another five or 10 years.

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