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Germany

German Government Reaches Deal with States on Bank Rescue

Germany moved a step closer towards injecting 480 billion euros ($650 billion) into its troubled banks with its 16 states swinging behind a federal rescue package which is expected to get parliamentary backing Friday.

A life buoy at the river Spree in Berlin

Germany's lifeline for its struggling banks is the biggest in Europe

Germany's federal government reached agreement with the country's 16 states on who will pay for a financial rescue plan that will underpin the banks, Chancellor Angela Merkel said Thursday.

Speaking after meeting state premiers in Berlin, the chancellor said the two sides had held "constructive talks" keeping in mind "the common responsiblity for our country."

German Chancellor Angela Merkel

Merkel has called the deal "tenable" and expects the rescue package to win parliamentary approval

Merkel said the two sides had agreed to share the burden of the rescue package, adding she was optimistic the legislative package would win approval in the German houses of parliament on Friday.

German rescue package the biggest

Most of the eurozone nations and some allies have agreed to identical aid packages, each comprising a huge guarantee for interbank lending and semi-nationalizations of banks by state equity funds.

Germany's rescue deal is the biggest, comprising 400 billion euros in guarantees, a 70-billion-euro fund and 10 billion euros of leeway.

Berlin says it will need a credit of 100 billion euros to operate the bank-support scheme, but the trading fund will earn interest and dividend income from banks it takes over. The ultimate net cost may be far less than the credit sum.

The headquarters of Hypo Real Estate

Germany has moved away from a case-to-case bailout for struggling banks

Finance Minister Peer Steinbrueck explained that when the final accounts were calculated after the rescue, the states would pay 35 percent of the cost, or possibly receive 35 percent of the profits if there were any.

State premiers said this was because the states, as proprietors of state banks, would have to sustain other losses in the crisis.

"It's a good outcome," said Juergen Ruettgers, premier of North Rhine Westphalia. Merkel called the deal "tenable."

Berlin to create new agency for bank rescue

Germany has not identified which of its banks need rescuing, but the nine landesbank companies owned by the states are seen as the weakest units. Two of them, WestLB and BayernLB, were hurt by investing in low-quality derivatives.

The cost burden on the states from the wider bail-out is to be limited to 7.7 billion euros, with the federal government to pay all higher bills, Steinbrueck said.

Government politicians said Germany would create a special agency for the bank rescue after the country's central bank said its independence would be compromised if it became an arm of government policy.

Instead of being a department of the Bundesbank, it would be a legally separate unit at the Bundesbank office in Frankfurt.

The Bundesbank, which is one of the principal central banks underpinning the European Central Bank in Frankfurt, had earlier told Berlin it did not want to be seen taking instructions from the German federal government.

To speed passage of the bill on Friday, votes are set to be held in the Bundestag lower chamber and the Bundesrat upper chamber on the same day.

In an unusual move, the bill is to be emailed back to the German government a few hundred metres away for the final formalities.

When the finance minister, chancellor and president have signed it, the government printer in Cologne will print 30,000 copies.

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