It is becoming increasingly clear that the country's banking system is among the worst affected by the global financial crisis, despite the absence in Germany over the past decade of high asset price inflation and unsustainable credit growth (features of the economies where the crisis has its origins). Proposals for a "bad bank" scheme have been unveiled, designed to remove dodgy assets from banks' balance sheets. The government was forced to eschew a bolder plan, however, in part owing to the extent of the perceived political costs of admitting to voters the size of the potential losses that they may have to bear.
The German financial system is ailing, not because of domestic developments, but because of the huge income flows that accrued to the country from its export boom being invested in a range of mostly US-originated financial instruments that are now illiquid and almost certainly worth much less than their book value. German policymakers, in line with their counterparts elsewhere, are struggling to deal with a financial crisis, of which the size and complexity are without precedent and the implications for taxpayers are potentially very lar...
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