UPDATE 3-WestLB wins another late-game rescue-sources

By Gernot Heller and Jonathan Gould

BERLIN/FRANKFURT, Nov 24 (Reuters) - German officials have clinched a rescue deal to stabilise WestLB just days before financial guarantees for the stricken state-backed lender were set to expire, sources involved in aid talks told Reuters.

'There is a basic agreement,' a government source said on Tuesday.

A WestLB owner source confirmed the deal, whose details were scheduled to emerge later on Tuesday.

The accord resolved a near bust-up as shareholders in crisis-rocked WestLB refused to blink in a poker game with Berlin and rival lenders over who should pay for a fresh bailout.

The brinkmanship could portend a wider shake-up of the banking landscape in Europe's largest economy if Berlin is forced take up the slack left by the bank's owners, the state of North Rhine-Westphalia and local savings banks.

WestLB needs funds because guarantees on some of its toxic assets are set to expire by the end of the month, even as its savings bank owners say they are no longer prepared to shoulder the Duesseldorf-based lender's losses.

'We are not prepared in principle' to make additional funding available for WestLB, Rolf Gerlach, president of the WLSGV savings bank association that holds a 25 percent stake in the lender, told Boersen-Zeitung newspaper in an interview.

Germany's savings bank association DSGV said the country's landesbanks -- public-sector wholesale banks -- had agreed to give financial backing to WestLB's plan to spin off 85 billion euros ($127 billion) of risky investments to a 'bad bank,' where they will gradually be wound down.

The urgency of the talks underscored how the financial and economic crisis is still rumbling through Europe's biggest economy, amid wider concern by credit rating agency Standard & Poor's that banks across the globe are undercapitalised.

Concerns over WestLB's future weighed on the euro and five-year credit default swaps on the bank widened 60 basis points to about 150 points.

But analysts said market fears that the bank could go under were overblown.

'It's a significant bank so it will have to be saved,' said Merck Finck analyst Konrad Becker, 'The question is who will pay for it this time.'

WestLB had said on Tuesday it was in intensive talks with Germany's bank rescue fund about support for its restructuring.

A spokesman for financial watchdog Bafin said it was not involved in the talks but that it would review WestLB's resulting capital position as part of its supervisory duties.

Sources told Reuters this month that Berlin looked set to approve a capital injection into WestLB of around 3 billion euros. But any additional aid will likely meet stiff resistance from the European Commission which needs to approve such measures.



RESTRUCTURING

EU competition commissioner Neelie Kroes has already demanded a change of ownership to end the WestLB 'saga.'

WestLB's plan is to create a healthy core bank that will focus on corporate customers, once it has spun off its risky assets.

But for that it needs more funding, and its savings bank owners have said it must look elsewhere for the 3-4 billion euros in additional cash that sources familiar with the situation say it needs.

German daily Frankfurter Allgemeine Zeitung on Tuesday said up to 5 billion euros was required.

Banking industry observers have suggested the country's seven independent landesbank groups could be merged to form two or three big groups, though analysts remain sceptical.

'A merger between a bank with a chronic illness, a bank on its deathbed, and a slightly sick bank won't bring about a healthy lender,' Becker said.

Landesbanks for years relied on public sector guarantees to provide treasury, capital markets and transaction processing services for local savings banks.

Many landesbanks expanded into higher-margin but risky investment banking activities after the European Commission imposed a ban on state guarantees in 2005, crimping their ability to lend to firms at razor-thin margins.

Like WestLB, Germany's No. 1 and No. 2 landesbanks, LBBW and BayernLB, as well as the smaller ship financier HSH Nordbank have been hit by billions of euros of writedowns in the financial crisis, forcing their owners to inject rescue funds to prop them up.

Since February 2008, WestLB has received 11 billion euros in guarantees from Soffin and the bank's owners to finance its sweeping restructuring programme.

(Additional reporting by Philipp Halstrick, Alexander Huebner, Edward Taylor and Patricia Uhlig; Editing by David Cowell) ($1=.6708 Euro) Keywords: WESTLB/ ([e-mail], Reuters Messaging: [e-mail]; [phone]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.