BERLIN PLANS to create a “bad bank” within two weeks to absorb an estimated €830 billion in so-called toxic assets from financial institutions.

German chancellor Angela Merkel has invited the country’s leading bank managers for talks to agree measures to restore confidence in the sector. But disagreement persists over whether the federal government should acquire toxic assets at a discount – the bank’s favoured solution.

Finance minister Peer Steinbrück said yesterday that the “the models under discussion boil down to the government not assuming responsibility” but acting as “guarantor”.

Five months before a general election, German politicians have little appetite for explaining to voters the huge expenditure a full buyout would entail.

The “decentralised” model preferred by Berlin would mean banks sell bonds which in turn would be used to buy toxic debt at book value. The bonds could be guaranteed – for a fee – by the German bank rescue fund Soffin.

According to a government statement, the model would be open to state and private banks.

Regardless of the plan chosen, Berlin is up against the clock to get it through parliament before the summer break. If, as expected, the cabinet agrees a bad bank deal in May, parliament will not be able to vote on the deal until before the summer recess and the election.

Germany’s banking associations welcomed the progress of talks but have said a speedy and coherent solution is urgently needed. “One bad bank is better than many bad banks,” said Mr Andreas Schmitz of the German banks association.

The bad bank discussions followed a rally in Germany’s ZEW index of economic sentiment. In its first positive reading since July 2007, the index of financial market confidence rose to 13 points in April, up from 16.5 points in March.

“It is becoming ever more likely that the economy will slowly recover in the second half of this year,” said ZEW president Wolfgang Franz. “Along with other indicators, the ZEW sentiment indicator reveals that there are well-founded expectations that the downward dynamics of the business cycle are bottoming out.”

The ZEW rise, after a stream of negative production and order data in recent days, helped the euro recover from a month-long low against the dollar.