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FINANCE

Berlin approves ‘bad bank’ for toxic assets to boost economy

Germany's cabinet agreed on a "bad bank" scheme on Wednesday to clean up toxic assets from banks' balance sheets, a key plank of Berlin's bid to turn around Europe's biggest economy.

Berlin approves 'bad bank' for toxic assets to boost economy
Photo: DPA

The plan, which has become somewhat of a political hot potato five months before a national election, would allow banks to park their toxic assets in specially-created institutions for up to 20 years.

Berlin hopes that removing these bad holdings from banks’ balance sheets will encourage them to begin lending to each other and to businesses and consumers, kick-starting an economy expected to shrink six percent this year.

After dumping these toxic assets – mainly securities which have become virtually worthless or that cannot be sold because of frozen markets – banks receive government-backed bonds worth 90 percent of the value of the original asset.

Twenty years later, the value of these assets will be assessed to determine the final cost to the taxpayer although the Finance Ministry has stressed that bank shareholders will have to pick up at least part of the tab.

Andreas Schmitz, from the federation of German private banks, said the scheme was akin to “a huge freezer in which each bank will have a shelf.”

“Their problem assets will be stored there and frozen. After the crisis, we will see if the merchandise can still be sold,” he said.

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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