Fate of ailing German bank IKB in balance

Business Materials 12 February 2008 20:30 (UTC +04:00)

( dpa ) - After days of secret negotiations, the fate of IKB, Germany's worst-hit bank in the US subprime loans crisis, is likely to be decided at a board meeting at its parent Wednesday.

The federal government bank, KfW, which owns 38 per cent of IKB, has been left holding the line after other shareholders said their funds had been exhausted.

KfW is considering sacrificing some of its "crown jewels" to rescue IKB, sources close to the negotiations in Berlin said Tuesday. KfW might raise a convertible loan, repayable with 1 billion euros' (1.45 billion dollars) worth of shares in German mail carrier Deutsche Post.

Currently KfW owns 31 per cent of the former German postal monopoly.

The sources said this option would be conditional on commercial banks such as Deutsche Bank posting a further 1 billion euros as a voluntary investment in averting an IKB crash and in protecting German financial prestige.

The sources said another option was a direct bailout by the federal government.

The newspaper Die Welt was to publish Wednesday remarks by German Finance Minister Peer Steinbrueck warning that there were limits.

"It's not easy to weigh up the harm from an insolvency against throwing good money in for further stability," he said.

He said a collapse of IKB might have serious knock-on effects on other German banks and trip up German economic growth.

"A bank failure can have wide-area effects you do not want," he said.

Steinbrueck also called for consolidation among Germany's state owned banks to create at least one powerful champion similar to Deutsche Bank among the commercial banks.

If no one steps forward with a new guarantee, IKB will have to apply for insolvency, banking sources said Tuesday.

The newspaper Sueddeutsche Zeitung said Tuesday there were "no taboos any more" against a direct government bailout, which would upset regulators.

It said Jochen Sanio, who heads Germany financial markets regulator, was preparing for IKB to fail, but had granted a few days of grace after being warned that German prestige would suffer if IKB declared insolvency.

The bailout reports pumped IKB shares 15 per cent higher to 5.68 euros on the Frankfurt market as of early afternoon Tuesday.

On Monday the stock had slumped 22 per cent after KfW told bankers that after two rescue packages for IKB last year it could not help any more and commercial banks resisted government arm-twisting to step in as saviours.

IKB, based in Dusseldorf, was a key to Germany's post-war economic miracle, lending to companies that built new factories.

KfW's board, chaired by German Economics Minister Michael Glos, is to meet in Berlin on Wednesday.

IKB refuses to confirm news reports that the market value of its securities and loans has slumped by a further 2 billion euros, bringing its accumulated losses to 11.5 billion euros (16.7 billion dollars).