Bad Bank

The German government has become increasingly concerned about Hypo Real Estate, a German property lender brought low by the financial crisis. The government, which has already provided more than 40 billion euros ($51 billion) in government loan guarantees, is desperate to keep the Munich-based company from going bankrupt.

The government is under increasing pressure to act fast to save the bank. Hypo Real Estate shares dropped 13 percent at the end of last week after Chief Executive Axel Wieandt said that the bank was finding more problematic loans on its books that might require additional state aid.

Some high-ranking government officials say they believe the only answer is to nationalize Hypo Real Estate and create a so-called "bad bank" to take over the troubled lender's toxic assets.

No formal proposal has been made, although a decision could come as soon as this week.

Difficult decisions

The proposal to nationalize Hypo Real Estate remains a political hot potato, going against Germany's post -World War II economic policy.

"I have deep constitutional concerns," Christian Democratic Union (CDU) business expert Josef Schlarmann, told the Hamburger Abendblatt newspaper in its Monday, Feb. 2, edition.

German law prohibits the government from taking a majority share in a private company. Yet Social Democratic Party (SPD) Finance Minister Peer Steinbrueck has recently been discussing a change to the law which would allow nationalizations when financial market stability is threatened.

SPD head Franz Muenterfering said that the government wanted to avoid nationalizing banks, but that it had to be considered when the bank's future was at risk.

"You have to consider whether the state, in order to fend off a fatal disaster, must take over such responsibilities for a time," Muenterfering said.

Political posturing

Further complicating the debate is that the CDU and SPD currently form a left-right coalition in the government. But the two political parties, Germany's largest, are also gearing up for a fall election showdown.

Germany's conservative Chancellor Angela Merkel, has said only that Hypo Real Estate must be brought "to a recovery position."

CDU leader Volker Kauder has said that it would be a mistake to let Hypo Real Estate go under.

"We should not let even one systemic bank in Germany go bankrupt," he told the Frankfurter Allgemeine Sonntagszeitung on Sunday, citing the problems that followed when Lehman Brothers in the US went bankrupt.

Creating a "bad bank"

If the Hypo Real Estate plan goes forward, Germany could become the first euro zone country to set up a state-backed bank to house toxic assets.

While opposition remains to setting up a national "bad bank," German politicians have warmed to the idea of setting up individual banks to house toxic assets.

"What I can imagine to be the right way is that each bank takes responsibility for its less valuable assets," the CDU's Kauder told the Bundestag, Germany's lower house of parliament, last week.

Yet a national "bad bank" might happen anyway. There are signs that Germany's commercial lenders are drawing up a plan to create a joint bad bank which would be guaranteed by the state, according to Reuters news agency.

Britain, US also discussion options

Germany is not alone in struggling to deal with toxic assets. The International Monetary Fund estimates that the losses from toxic assets will cost US and European banks $500 billion.

Governments in the United States and Britain are also debating how to best clean up the banks. US President Barack Obama is expected to roll out plans this week for cleaning up debt and recapitalizing banks and has also discussed the possibility of setting up a "bad bank."