1ST LEAD: German cash injection of 70 billion euros mooted

Business Materials 13 October 2008 14:36 (UTC +04:00)

Berlin (dpa) - Berlin was to issue details Monday of how Germany will inject 70 billion euros (95 billion dollars) into the banking system this week as part of a rescue plan for the world economic system, government sources said, reported dpa.

Up to 400 billion euros more would be offered in government guarantees.

Chancellor Angela Merkel was expected to speak to the media in the afternoon.

A copy of the draft legislation obtained by Deutsche Presse-Agentur dpa indicates Germany will set up a government fund that will inject money into the banks while accepting troubled assets from the banks as security.

Germany's Finance Ministry would be authorized to borrow 70 billion euros for the plan, both to cover a liquidity injection for the banks and to take over tainted securities.

The proposed Financial Market Stabilization Fund will require government credit, increasing Germany's net public borrowing.

Securities, mainly derivatives, which had been on the banks' books until, but not after, Monday this week could be taken off the hands of the financial institutions by the fund.

The banks would be required to show they were pursuing "careful" business plans and the government would have power to set caps on their executive pay.

In addition the draft bill authorizes the German state to guarantee interbank trading.

The Finance Ministry would also have the power to extend guarantees totalling 400 billion euros up to December 31, 2009. Banks would have to pay a fee of 2 per cent per annum for such guarantees.

Sources said Merkel and the two leading Social Democrats in her coalition government had agreed in the night on the basics of the plan, with the next move being to discuss it in cabinet.

The two Social Democrats, Finance Minister Peer Steinbrueck and Foreign Minister Frank-Walter Steinmeier, will be key in securing parliamentarians' support for a rapid passage of the bill.

Together, Merkel's Christian Democrats and the Social Democrats have an overwhelming majority in the Bundestag lower chamber.

Merkel was expected to address the media at 3 pm Berlin time (1300 GMT) with her remarks to be broadcast live on all-news television.