The German government will later on Monday present details of a cash injection amounting to 70 billion euros that it intends to inject into its banking system this week, as part of a plan to rescue the global economic system, according to official sources in Berlin.
An additional 400 billion euros will be offered by the German government in the form of state guarantees. According to a draft law obtained by the news agency Deutsche Presse-Agentur, Germany will establish a government fund that will inject cash into banks and will take distressed assets from banks as collateral. The German Ministry of Finance will be authorized to borrow 70 billion euros for this plan, to cover the injections for banks as well as to take over toxic securities.
The proposed Financial Market Stabilization Fund will require the government to take out loans, thereby increasing the net borrowing of the German government. The fund could take over securities, mainly derivatives, that were on the banks’ books until the close of business on Monday. Banks will be required to demonstrate the implementation of prudent business plans while the government will have the authority to establish caps on the salaries of their executives. Furthermore, the draft law authorizes the German state to guarantee interbank loans.
The Ministry of Finance will also have the authority to extend guarantees totaling 400 billion euros until December 31 of next year. Banks will have to pay an annual fee of 2.0 percent for such guarantees. Official sources also report that German Chancellor Angela Merkel and two key Social Democrats in her coalition government, Finance Minister Peer Steinbrueck and Foreign Minister Frank-Walter Steinmeier, have essentially agreed on the plan to rescue the banking system on the night from Sunday to Monday. Chancellor Merkel is expected to address the public in the afternoon. (H)
