Subprime crisis could leave German taxpayers with the bill

Will German taxpayers foot the bill for bank errors exposed by the international subprime lending crisis? Such fears are rising after another public financial institution unveiled a bail-out this week.

BayernLB, Germany’s second-biggest regional state bank, joined the list on Thursday

of those that have had to call for help from shareholders.

The Munich-based bank plans to put investments in risky asset-backed securities linked to the US market for subprime mortgages into a separate structure guaranteed by its owners, the state of Bavaria and regional savings banks.

If the securities turn out to be worth less than their nominal value owing to massive defaults on US home loans, the bank, the state and the public savings banks would have to honor guarantees worth around €six billion ($9.4 billion).

That means “in the end, the taxpayer would have to carry the cost,” said Reiner Holznagel, director of the German taxpayers federation.

BayernLB is not an isolated case. Two other regional banks, WestLB in the state of North-Rhine Westphalia, and SachsenLB in eastern Saxony have come up with equivalent rescue packages backed by several billion euros in public guarantees.

Such measures have angered some German politicians. “Bavarian taxpayers are being bled dry because the bank makes large and risky speculative investments under the nose of the government,” said Thomas Muetze, fiscal spokesman for the environmentalist Greens party in the Bavarian regional parliament.

For Gerhard Papke, president of the Liberal Party in North-Rhine Westphalia, “a large publicly-owned bank represents a risk for the taxpayer.” In the case of WestLB, he said the bank “should be prepared for privatization to avoid additional risks to taxpayers.”

But regional banks are not the only ones at risk.

The federal German government flew to the rescue of troubled business lender IKB to avoid a bankruptcy that could have spelled catastrophe for other banks in addition to the small- and medium-sized enterprises financed by IKB, according to Finance Minister Peer Steinbrück.

Berlin has pumped billions of euros into IKB, in which it already owned a stake of around 43 percent via the public development bank KfW. That holding is set to rise to around 90 percent via a capital increase. That is the equivalent of nationalizing IKB, similar to the way the British government has taken control of the distressed bank Northern Rock to prevent its bankruptcy.

“It doesn’t work out well when the state tries to play banker,” said Holznagel, who called for regional and federal governments to divest their holdings and for increased controls over banks’ accounts.

It is hard to say what the international crisis’ impact will be in the end. Holznagel’s federation expects bank losses to reach between €15 billion and €20 billion, but is not able at present to calculate the cost to taxpayers.

It is certain they will not be spared however, while Steinbrück warned in February that saving IKB would weigh on the federal budget for several years.