State Bail-Out

German Finance Minister Peer Steinbrueck said on Wednesday, Feb. 13, that the rescue package involved 1.5 billion euros in financial aid, of which the federal government would take on one billion euros. He said he was counting on German banks to put up the remaining 500 million euros.

The massive cash injection marks the first time the German government has stepped in directly to prop up a casualty of the subprime loan crisis in the US which has buffeted banks in Europe since last summer.

IKB became the first victim of the subprime crisis last year and was bailed out twice by shareholders in rescues costing more than six billion euros. German state-owned bank KfW, which is IKB's biggest shareholder with a 38-percent stake, has shouldered the lion's share of the bail-out so far.

Another state-owned group, BayernLB, also confirmed Wednesday that it had a hole in its accounts totalling nearly two billion euros. The sum was dwarfed by the 11.5 billion euros in losses at IKB. IKB, which lends mainly to industry to build factories, unwisely hedged with near-worthless US mortgages and lost.

"Incalculable consequences"

"After lengthy talks we have decided to do all we can to save IKB," German Economy Minister Michael Glos said after a meeting of the supervisory board of KfW.

Finance Minister Steinbrueck warned against allowing IKB to go bankrupt. A collapse would have "threatened a huge loss of trust in Germany's financial reputation," he said, adding that it would trigger a guarantee mechanism that would spread the bank failure across the entire financial sector.

"The potential fallout from an IKB insolvency is incalculable," he said.

Steinbrueck added that the bail-out would have no additional impact on Germany's 2008 budget but would have reverberations in the next years.

Bail-out criticized

The government is expected to open talks with private German banks in the coming days and urge them to step up to rescue IKB.

News of the government bail-out has angered some politicians who have accused Chancellor Angela Merkel's grand coalition of squandering taxpayers' money.

"It is intolerable that the taxpayers should be paying this bill," Michael Fuchs, a member of Merkel's Christian Democratic Union (CDU) told London's Financial Times.

Germany's media has also been critical of the government rescue package, saying the banks themselves are responsible for the mess they created and that it wasn't fair to prop up a discredited public sector financial industry.