As the German government finalized a bailout for ailing bank IKB, another state-owned group, BayernLB, confirmed Wednesday a hole in its accounts totalling nearly 2 billion euros (3 billion dollars), according to dpa. Government officials in Berlin made plain that they would not let IKB collapse. Both banks were caught short by the slump in value of US sub-prime mortgages. BayernLB, controlled by the state government of Bavaria, said its 2007 accounts would contain sub-prime write-offs of 150 million euros and a related earnings shortfall calculated at 450 million euros. In addition, balance-sheet assets would be marked down by 1.3 billion euros, although the bank would, based on present facts, remain in operational profit by 1 billion euros and pay a dividend. The disclosure followed weeks of speculation that the bank had taken a bad hit in the crisis. The sums were dwarfed by the 11.5 billion euros (16.7 billion dollars) in losses at IKB, a smaller business which is 38-per-cent owned by the federal government development bank KfW. Berlin's bailout package remained under wraps Wednesday as government ministers met the KfW board in Berlin. KfW twice plugged the gaps at IKB last year, but the help was not enough. There were some calls from German politicians Wednesday to cut IKB loose and let it collapse. At a Berlin news conference, a German government spokesman, Thomas Steg, rejected the suggestions that the IKB be allowed to fail as simplistic and not taking the possible consequences into account. He declined to give details of the lifeline, saying only, "it aims at a solution involving all parties." IKB has refused to confirm news reports that the market value of its securities and loans has slumped by 2 billion euros, bringing its accumulated losses to 11.5 billion euros. The business newspaper Handelsblatt reported Wednesday that IKB's latest funding gap was even bigger and was "apparently" close to 3 billion euros (4.4 billion dollars). IKB, which lends mainly to industry to build factories, unwisely hedged with near-worthless US mortgages and lost. Handelsblatt said Wednesday the crisis would have a knock-on effect on the government budget. Berlin and the German state governments must divert funds into rescue plans for the battered state banks and IKB. In addition, they would face a 5-billion-euro shortfall in tax revenues as bank earnings vanished.
