UPDATE 1-German banks say no need for rescue fund

Wed Oct 5, 2011 9:17pm IST

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* Finance ministry says could reactivate SoFFin

* Banks say rescue fund not needed yet, restructuring law enough

* Experts see Berlin preparing banks for Greek writedown

(Adds joint banking associations comment)

By Sarah Marsh and Philipp Halstrick

BERLIN/FRANKFURT, Oct 5 (Reuters) - German banks said on Wednesday there was no need yet to reactivate the bank rescue fund SoFFin, a move floated by the government amid growing expectations the financial sector may have to bear a larger-than-expected writedown on Greek debt.

German Finance Minister Wolfgang Schaeuble surprised the sector on Tuesday evening by saying Berlin could reactivate measures used at the height of the banking crisis in 2008, such as SoFFin, to prevent another crisis [ID:nB4E7KG026].

Berlin had previously said it would never again let taxpayers bear the burden of banks' mistakes and passed a bank restructuring law to replace SoFFin, which expired in January.

German public and private banks said in a joint statement the financial sector was much better placed now to face future challenges thanks to the new law, but did not rule out a future need for SoFFin to be reactivated.

"The government has clearly said it could reactivate the laws of 2008 if necessary," they said. "This is not the current scenario."

A spokesman for Germany's VOEB public-sector banking association said separately it did not see any potential restructuring case in Germany: "There’s no need for activism."

During the crisis, Landesbanken such as BayernLB [BAYLB.UL] and WestLB [WDLG.UL] received billions of euros of guarantees from the 480 billion euro SoFFin rescue fund. [ID:nLDE68F1CM]

A finance ministry spokesman said all German banks were well-equipped right now, but the government stood ready to capitalise banks if necessary - a sentiment echoed by Chancellor Angela Merkel later on Wednesday, highlighting rising fears of a new liquidity crunch. [ID:nB4E7KG022]

"The German government stands ready to implement such a capitalisation of the banks if it is needed," Merkel told a news conference in Brussels. [ID:nB4E7KT004]

European finance ministers agreed on Tuesday to safeguard their banks as doubts grew about whether a planned second bailout package for debt-laden Greece would go ahead. [ID:nLDE794005]

Hours earlier French-Belgian municipal lender Dexia SA (DEXI.BR) had become the first European bank to have to be bailed out due to the euro zone's sovereign debt crisis.

"Everyone said the big concern is that worrying developments on the financial markets will escalate into a banking crisis," Schaeuble told a news conference after the meeting of European finance ministers in Luxembourg.

Hans-Peter Burghof, banking expert at University of Hohenheim, said Schaeuble should not highlight German banks as "the problems do not lie with German banks, but rather with the French or Belgian ones."

Germany introduced a restructuring law this year providing for the orderly winding down of banks that run into trouble, including a levy enabling banks to insure themselves against failure.

SoFFin now only guarantees existing support measures for banks such as Germany's second-biggest lender Commerzbank (CBKG.DE) which resorted to state bailouts during the financial crisis.

A reactivation of SoFFin could be interpreted as an admission that Chancellor Angela Merkel's coalition does not trust its new law as sufficient.

"The government promised the restructuring law would be enough, and it's sad when so quickly thereafter it already questions its efficiency," said Wolfgang Gerke, president of the Bavarian Financial Centre.

"This must not lead to huge pots of money being made available."

Opposition lawmakers, called this week for a speedy reactivation of SoFFin to prevent another financial meltdown. Such a move would have to be ratified by parliament.

Social Democrat budget expert Carsten Schneider said it was terrifying the government was not prepared for serious liquidity problems at banks, unlike in other countries, and did not appear to have a plan B.

However, financial experts said it was positive that politicians were making the European banking system the focus of their efforts to resolve the debt crisis, rather than the debt-laden economies themselves.

"Thus we (Germany) are bracing for a truly considerable debt haircut," said Burghof.

The growing prospect of a debt default by Greece in the coming months has stoked fears of a major banking crisis in Europe that would aggravate the global economic slowdown.

The BdB banking association warned last week against re-negotiating a 21 percent haircut on Greek sovereign debt agreed by lenders. [ID:nL3E7KT2DG]

(Additional Reporting by Gernot Heller, Matthias Sobolewski, Erik Kirschbaum and Stephen Brown. Editing by Jane Merriman)

((sarah.marsh@thomsonreuters.com)(+ 49 30 2888 5226)) Keywords: GERMANY BANKS/SOFFIN

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