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.

For members


Bar closures and no Christmas markets: How Bavaria is tightening Covid rules

Bavaria will order the closure of all bars and clubs as part of sweeping new restrictions to try and control the Covid spread and ease overrun hospitals. Here's a look at what's planned.

Closed Christmas market stalls in Munich.
Closed Christmas market stalls in Munich. Photo: picture alliance/dpa | Sven Hoppe

On Friday Bavarian state leader Markus Söder announced more tough restrictions to deal with spiralling Covid infections and packed intensive care units.

“The corona drama continues,” said Söder after the cabinet meeting, adding that 90 percent of Covid patients in state hospitals are unvaccinated. “Being unvaccinated is a real risk.”

Bavaria has a vaccination rate of 65.9 percent – lower than the nationwide rate of almost 68 percent.

READ ALSO: Bavaria cancels all Christmas markets in Covid surge

Söder said the state’s Covid package was about “blocking, braking and boosting”, adding that vaccination centres will be ramped up. 

“We must act,” he said. “Bavaria is exhausting almost all legal means until December 15th.”

Earlier this week, Bavaria introduced a state-wide 2G rule, meaning only vaccinated people (geimpft) and people who’ve recovered from Covid (genesen) can enter many public spaces. People who are eligible to get vaccinated but choose not to get it are excluded. 

Here’s an overview of the planned restrictions set to come in on Wednesday, as reported by local broadcaster BR24. 

Bars, clubs and restaurant curfew

From Wednesday, and for three weeks, all nightlife like clubs, discos, bars, pubs and brothels in Bavaria are set to close their doors. Restaurants will have to shut at 10pm. So planned Christmas nights out will likely need to be cancelled or postponed. 

Christmas markets

There will be no Christmas or Christkindl markets in Bavaria this year. In the past days, several cities had announced that they would not be holding these events this year due to the Covid situation. 

Contact restrictions on the unvaccinated

Söder announced new restrictions on the number of people those who are not inoculated can socialise with. A maximum of five unvaccinated people will be allowed to meet, from two different households. Children under 12 will not be included in the total, as well as vaccinated or people who’ve recovered from Covid.

Cultural and sporting events

All cultural and sporting events can only take place with significantly reduced spectators. At theatres, opera performances, sporting events, in leisure centres and at trade fairs, there will be a 25-percent capacity limit. The 2G plus rule also applies. This means that only vaccinated and recovered people are allowed to enter (not the unvaccinated) – and only with a negative rapid test. Masks are compulsory everywhere.

Universities, driving schools, close-body services: 2G plus

All universities, driving schools, adult education centres and music schools will only be open to those who have been vaccinated and have recovered – making it 2G. This rule also applies to body-related services, like hairdressers and beauty salons. Only medical, therapeutic and nursing services are exempt from the 2G rule. So unvaccinated people can still go to the doctor or receive a medical procedure. 

KEY POINTS: Germany finalises new Covid restrictions for winter


Shops remain exempt from 2G rules, meaning unvaccinated people can visit them. However, there is to be limits on capacity. This means that fewer customers are allowed into a shop at the same time.

Special rules for hotspots

Currently, the incidence in eight Bavarian districts is above 1,000 infections per 100,000 people in seven days. Here and in all other regions where the incidence goes above this number, public life is to be shut down as far as possible.

This means that restaurants, hotels and all sports and cultural venues will have to close. Hairdressers and other body-related service providers will also not be allowed to open for three weeks, and events will also have to be cancelled. Universities will only be allowed to offer digital teaching. Shops will remain open, but there must be 20 square metres of space per customer. This means that only half as many customers as in other regions are allowed in a shop.

If the incidence falls below 1,000 for at least five days, the rules are lifted.

Schools and daycare

Throughout Bavaria, schools and daycare centres are to remain open. However, there will be regular Covid testing. Children and young people have to continue to wear a face mask during lessons, including school sports, unless they are exercising outside. 

Bavaria is expected to approve the measures on Tuesday and they will be in force until at least December 15th. We’ll keep you updated if there are any changes.