Merkel ally resigned over mortgage crisis

A regional ally of Chancellor Angela Merkel was forced to resign Monday, becoming the first political casualty in Germany of the U.S. subprime mortgage crisis. The move was expected to give a boost to the fast-growing Left party, which called immediately for new elections in the affected state, Saxony.

The Left's demands were the latest illustration of the paralysis and fragmentation currently reshaping German politics.

On one hand, the governing national grand coalition of Merkel's conservative Christian Democrats and the Social Democrats seems to have ground to a halt in pursuing reforms.

That has helped open the way for smaller parties to make gains that would - if a national election were held today - spell huge losses for the Social Democrats, but also leave Merkel's party without a convincing majority.

The Christian Democrat Georg Milbradt, 63, had governed Saxony since 2002, but said he was stepping down, probably at the end of May, after the debacle over the state-supported SachsenLB bank, which racked up over €30 billion, or $47.5 billion, of shaky investments, including in subprime.

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So far, Merkel's coalition has not been criticized in any serious way for intervening to protect state-owned banks beset by problems stemming from the subprime crisis and save them from collapse.

SachsenLB was rescued last year by a rival in Bavaria, LBBW, for a minimal price, sparking a bitter dispute in Saxony over Milbradt's handling of the whole affair.

The state of Saxony still remains liable for most of Sachsen LB's losses, which could amount to €1.2 billion, according to Siegfried Jaschinski, chief executive of LBBW.

Last week, Ingrid Matthäus-Maier, a former Social Democrat minister, resigned as head of KfW bank, another casualty of bad subprime investments.

Matthäus-Maier had come under fire in recent months over her handling of the fallout from the global credit crisis. KfW owns 45.5 percent of the corporate lender IKB, which had to be bailed out with a rescue package of more than €8 billion after making heavy write-downs on its security investments. KfW covered about €6 billion of the bailout.

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