GERMANY - German finance minister Peer Steinbrück has warned against a categorical ban on dividend payments by banks which have been rescued by the their governments.

Ahead of today's meeting of EU finance ministers at the Economic and Financial Affairs Council (ECOFIN) in Brussels, Steinbrück said last night such a ban would be counter productive since potential investors, namely pension funds, rely on dividend payments.

He added a leeway for dividend payments is necessary for the recapitalisation of suffering financial institutions.

Germany is currently caught up in a war of words with the European Commission on the planned financial aid for German bank Commerzbank, as Brussels has demanded there be a limit on its dividend payments if Commerzbank receives state aid.

Steinbrück also said yesterday the effort to stabilise the financial sector in the European Union is slowly taking off, as banks are still displaying an intrinsic distrust among each other, while criticising the EC for delaying a solution with bureaucracy.

Neelie Kroes, European Commissioner for competition, has today said she will review the rules that apply to the assessment of state support to banks before Christmas following criticism from member states that the process is too bureaucratic and slow.

As a Commissioner, Kroes needs to evaluate if state support does not lead to disruption of the market.

IPE reported yesterday the EC has referred Spain and Portugal to the European Court of Justice (ECJ) for what it sees as discriminatory rules on overseas pension funds in relation to dividend or interest payments. (See IPE article: EC tackles Portugal, Spain and UK over pensions)

Spanish pension funds, for example, are exempt from paying tax on their income and can claim back withholding tax on the dividends they receive. Yet pension funds elsewhere are required to pay an 18% withholding tax on dividend payments.

Portugal also carries a 25% withholding tax on its dividends earned by overseas pension funds, making it potentially unattractive for foreign investors to hold Spanish or Portugese stock.

Officials say this amounts to the restriction of the free movement of capital, in contravention of Article 56 of the EC Treaty and Article 40 of the EEA.

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