The package builds on the action plan endorsed on Sunday by the heads of state and government of the 15 eurozone countries, the United Kingdom, the European Central Bank and the European Commission.
After the cabinet decision, Federal Minister of Finance Peer Steinbrück spoke of the danger involved in delaying action, because the financial crisis is increasingly making its presence felt in the rest of the economy.
Protecting the economy from any more drastic impacts
Like the Finance Minister, Angela Merkel stressed that the cabinet aimed not only to stabilise the financial system. "The package of the German government aims to protect our citizens – not to protect the interests of the banks,” the Chancellor underscored.
A stable financial market is a public good – it is essential for small and large businesses, local authorities, all those who have made private arrangements and investments for their old age pensions, and for all savers.
Getting the lending markets back into gear
Photo: REGIERUNGonline/Steins (Archiv)
The package will protect jobs and growth in Germany says Finance MinisterThe goal of the desperately needed state assistance is first and foremost to get banks to lend to one another again. Interbank lending had practically dried up, as confidence disappeared. Even basically sound institutions found themselves very rapidly facing liquidity problems under these circumstances.State guarantees of up to 400 billion euros are now to revitalise the interbank lending market. Banks need this liquidity if they are to continue to provide the capital needed by the rest of the economy.
The guarantees mean that the state will only step in if banks genuinely default on interbank loans, Peer Steinbrück underlined. To cover this eventuality the Finance Minister has allowed for five percent of the total guarantee, i.e. 20 billion euros, in the national budget.
Strings attached
Banks that are ailing as a result of problem loans, can sell their problem assets to the state. A sum of up to 80 billion euros has been earmarked for this purpose.
Photo: REGIERUNGonline/Eckel
Restoring confidence in the marketsEvery German and foreign financial institute operating on the German market will be able to draw on the services of the new package. For a reasonable fee, as both the Chancellor and the Finance Minister were at pains to point out. If appropriate, the state could acquire stakes in the businesses.The state assistance is limited until the end of 2009, and is conditional on strict requirements being met. Financial institutes making use of the capital assistance will be required to meet certain criteria. They must undertake to reform their business models, bonus systems and "golden handshake” systems. They will also be required to suspend the payment of dividends to shareholders.
The accounting guidelines for banks are to be rewritten, to allow the institutes to respond more flexibly to the pressures entailed by the financial crisis. The new regulations are to apply for the ongoing third quarter of this year.
Acceptable strain on budget given the potential consequences
The additional strain this will put on the national budget is acceptable, declared the Chancellor, given the potential consequences of any failure to take action.
It is uncertain now whether or not the government’s goal of achieving a budget with no new debts can realistically be achieved by 2011. "We have not lost sight of our goal of a balanced budget – even if it may now take longer to achieve,” stated the Finance Minister unequivocally. The overriding priority at the moment must be to protect Germany from further damage though.
Building blocks for a new financial charter
In the long term, the German government and its international partners would like to see stricter international regulations that would put markets on a sounder footing.
We must now learn from the undesired developments of the market, and together take the necessary steps to prevent any repetition, said the Chancellor. Germany will be working to strengthen the role of the International Monetary Fund as a watchdog for financial institutions. Better regulations for rating agencies are to result in more reliable assessments of businesses, and higher equity capital requirements and more transparent investment products are to put markets on a sounder footing.
The international consultations required are already scheduled: the EU will be meeting for a summit meeting on Wednesday and Thursday this week, the EU-Canada summit will be held at the end of the week and the EU states will be meeting with Asian states at the end of October in Beijing. In November the leading industrial nations (G8) will be discussing the relevant issues with the major emerging economies.
New structures for a market economy with a human face
The Chancellor admitted that the measures now adopted are far-reaching and in some cases drastic. "But we are facing the excesses of the market,” she pointed out. In a social market economy it is the duty of the state to keep control. "With our new financial market charter we are taking radical action, of that there can be no doubt – so that the events we are not seeing are not repeated,” explained the Chancellor. "We are thus creating the structures for a market economy with a human face.”
The most important goal is now to generate new confidence – between banks and on the part of savers. "Confidence is the currency we pay in,” as the Chancellor put it.
