Germany in $2.2bn effort to save IKB

Germany in $2.2bn effort to save IKB

By Bertrand Benoit in Berlin and Rachel Morarjee in,Frankfurt

Published: February 14 2008 02:00 | Last updated: February 14 2008 02:00

The German government is to lead a €1.5bn ($2.18bn) bail-out of IKB in a third attempt to save the small-business lender, after the finance minister said the potential fallout from its insolvency would be "incalculable".

The attempt to rescue the bank marks the first time Berlin has stepped in directly to salvage a casualty of this credit crisis.

IKB became the first German victim of the crisis last summer and was bailed out by shareholders twice to the tune of more than €6bn.

So far, KfW, the state-owned development bank, which is IKB's biggest shareholder with a 38 per cent stake, has shouldered the bulk of the burden.

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

News of the effort sparked protests from government and opposition politicians, who accused the coalition of Angela Merkel, chancellor, of wasting taxpayers' money in propping up what they described as a discredited public sector financial industry.

"It is intolerable that the taxpayer should be paying this bill," said Michael Fuchs, a member of parliament from Ms Merkel's Christian Democratic Union.

The bail-out was announ-ced last night after a four-hour meeting of KfW's supervisory board.

In addition to the government's €1bn participation, as yet unspecified shareholders will provide €500m. The total, however, falls short of IKB's reported need for a capital injection of nearly €3bn to mop up its losses.

Peer Steinbrück, the finance minister, called on private sector banks to take part in the rescue, which they have so far refused to do. The banks, however, stand to lose €24bn, according to the finance ministry, from a collapse of IKB.