Kirch, setback for German banks

April 5, 2002 Posted: 6:14 AM EST

MUNICH, Germany - The financial crisis facing media giant KirchGruppe is the latest, and the largest, challenge for Germany's beleaguered financial sector.

If Kirch fails, creditor banks could be stuck with a bad debt bill totalling as much as 6.5 billion euros ($5.75 billion), as well as millions more in other financial obligations to the group.

German banks are already hurting from a string of high-profile failures in the past year that cut a huge swathe through their profit margins. They also face rising costs due mainly to higher wages -- a result of the country's strong labour laws -- and falling income as Germany, Europe biggest economy, struggles to lift itself out of recession.

MORE STORIES • Profile: Leo Kirch  • Kirch set to file for insolvency  • Kirch's media empire crumbling

"Although the nature of the German media group and the developments associated with its financial demise are one of a kind, the situation nevertheless crystallises many of the underlying issues affecting the sector," wrote investment bank Bear Stearns in a note to investors.

"The accumulation of problem situations and associated mounting bad-loan provision charges is... starting to represent a significant burden on the banks' financial strength."

The biggest loser in the Kirch saga is likely to be Bayerische Landesbank, the bank controlled by the state of Bavaria, which has a 1.9 billion euro exposure to Munich-based Kirch.

Bayerische has been criticised for being too quick to loan money to the group to help fund the whirlwind expansion that is now causing its demise. Also coming under fire is Bavarian premier Edmund Stoiber, the conservative candidate in Germany's national election, who has encouraged Bayerische to provide the loans to Kirch.

Other creditor banks include the country biggest financial group Deutsche Bank, which has a debt exposure to Kirch of about 700 million euros, while HVB Group is owed 460 million euros and Dresdner Bank, a unit of insurance group Allianz AG, is also owed 460 million euros. Commerzbank has a debt exposure of 350 million euros.

Outside Germany, U.S. investment banks Lehman Brothers and J.P. Morgan Chase are estimated to each have between 250 and 300 million euros in loans to Kirch.

The possible collapse of Kirch would add to the financial burden facing German banks.

Last month, 150-year-old construction giant Philipp Holzmann filed for insolvency after creditor failed to agree on a rescue package.

That left Deutsche Bank -- which has a 19.6 percent stake in Holzmann -- with bad debt of 300 million euros, while Bayerische Landesbank was owed more than 200 million euros, and Commerzbank and HVB Group around 140 million euros each. Dresdner Bank had an exposure of about 100 million euros.

In the past few weeks, plane maker Fairchild Dornier and stationery maker Herlitz also collapsed, leaving millions of euros owed to banks.

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