Toxic debt

The German chancellor Angela Merkel and representatives from Germany's central bank, the Bundesbank, as well as from the government's Financial Market Stabilization Fund, met in Berlin to discuss how to sort out the problem of German banks' "toxic" assets.

“We have taken a big step forward,” said German Economics Minister, Karl-Theodor zu Guttenberg, after the meeting.

Guttenberg said he was confident that the government will be able to finalize details of its proposal to allow banks to remove so-called toxic assets from their balance sheets by July, before the government's summer recess. During Tuesday's meeting, Chancellor Merkel and government ministers agreed to put forward a plan by the middle of May.

The government is aiming for a solution that would apply to all troubled financial institutions, including both state and privately controlled banks. A proposal put forward by the German Finance Minister, Peer Steinbrueck, would set up individual bad banks rather than one central institution for the country as a whole. Under the plan, the government would help banks clear their balance sheets of toxic assets with the help of guarantees. One of the key questions, a government said, will be to decide which assets qualify, and how they should be valued.

Bankers call for a speedy solution

The German banking sector had been urging the government for some time to deal with toxic assets, which are linked to the mortgage crisis in the United States. The Frankfurter Allgemeine Zeitung newspaper reported Steinbrueck as saying that he estimates that German banks are burdened with 853 billion euros ($1.1 trillion) in so-called toxic assets.

The Association of German Banks, an institution that represents the interests of private commercial banks, called for a speedy solution to the banking problem.

"One bad bank is better than many bad banks," the association's president, Andreas Schmitz, told state-TV broadcaster ZDFearly on Tuesday. "If the government doesn't create a bad bank, then small private banks will need to write off their bad loans, thus lowering their capital and reducing the chances for borrowers to get loans," he warned.

Similar plans have been introduced in the United States, Britain and Ireland. German banks have more than 850 billion euros in toxic assets, which are either worthless or cannot be sold in the current economic climate.