Brussels Approves European Bank Rescue Packages | Business| Economy and finance news from a German perspective | DW | 23.12.2008
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Brussels Approves European Bank Rescue Packages

The EU's executive on Tuesday approved a raft of member-state plans to prop up their ailing financial institutions, including Germany’s IKB and NordLB, two of the country’s banks worst hit by the financial crisis.

Board members of IKB, Reinhard Grzesik, Dieter Glueder, supervisory board chairman Ulrich Hartmann, CEO Guenther Braeuning and board member Claus Momburg, from left, are silhouetted at the annual meeting in Duesseldorf, Germany

IKB was Germany's first casualty of the subprime mortgage crisis

The German plan to guarantee the two banks' business is "necessary to avoid a serious disturbance in the German economy," the European Commission said in a statement.

The plan will attempt to ensure that neither IKB nor NordLB can benefit from an unfair commercial advantage gained through the assistance package, the commission added.

Under the German scheme, IKB will receive a state guarantee covering up to 5 billion euros ($7 billion) worth of debt in a bid to guarantee the bank's ability to refinance its business in the midst of the global credit crunch.

NordLB, which was also hit hard by the worldwide freezing up of credit markets, is to receive a state guarantee which is to run for up to five years and is backed by a "very good, diversified guarantee pool of assets," the commission statement said.

The commission is tasked with making sure that member states do not break the bloc's strict rules on fair competition when they move to prop up key businesses or industries.

Spanish, Italian packages

At the right, the north facade of the Bank of Spain headquarters

The Bank of Spain's governor warned of total financial meltdown

The commission also approved a Spanish state guarantee for inter-bank lending valued at up to 200 billion euros, officials confirmed.

The scheme has an initial ceiling of 100 billion euros, but this can be doubled "if market conditions request it," the commission said, adding that the package was an "adequate means to remedy a serious disturbance in the Spanish economy."

An Italian scheme for bailing out troubled banks valued at up to 20 billion euros was also approved Tuesday, allowing that country's government to buy into banks unable to weather the global financial crisis.

The decision, which was taken after "intensive" negotiations with the Italian government, allows Rome to deploy "around 15 to 20 billion euros" to bail out troubled lenders, but only if they can prove that they are "fundamentally sound."

Latvian bank aid

A Latvian government plan to support its banks was also approved Tuesday. Latvia has emerged as one of the European countries most affected by the global economic slowdown.

A view of the Old City in Riga, Latvia

Tough times could lie ahead for Latvia if a deep recession eventuates

The plan, worth up to 10 percent of Latvia's total economic output and set to last for six months, allows Riga to take over distressed banks and gives sweeping guarantees on loans and deposits in a bid to stabilize the country's jittery financial sector.

But, like the German plan, the Latvian package is bound by strict commission rules on how and when the government could use those rights so as to avoid handing banks an unfair commercial advantage.

The commission "therefore concluded that the scheme was an adequate means to remedy a serious disturbance of the Latvian economy," a separate commission statement said.

Deep recession ahead

Since Latvia joined the EU in 2004, its small, lightly regulated economy has consistently recorded both the highest growth rates and the highest inflation in the bloc.

That growth was principally fuelled by domestic consumption driven by a booming market for consumer borrowing. And it left Latvia extremely vulnerable to the shocks of the current financial crisis.

In recent months the economy has gone into reverse, with analysts predicting a severe recession and rumors of an impending devaluation of the national currency, the lats, sweeping the country.

On Friday the International Monetary Fund approved a 7.5-billion-euro stabilization package for the Baltic state.

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