By Tristana Moore
BBC News, Berlin
The markets soared in the wake of Mr Steinbrueck's intervention
It has been billed as the largest financial rescue package in Germany's post-war history.
German political leaders are running out of superlatives to describe the bail-out of Germany's banks, after Chancellor Merkel said "drastic action" was needed to shore up the financial system and insisted the damage to Europe's biggest economy would have been "incalculable" if the state had not intervened.
After the collapse of the investment bank Lehman Brothers in the US sent shockwaves around the world, Germany had to act, insists the country's finance minister, Peer Steinbrueck, in an interview with BBC News.
"The German banking system is more robust than the banking sector in many other countries," he says.
"We have not had a property crash in Germany, and we have a solid universal bank system.
"But some German banks have been heavily affected by the insolvency of Lehman Brothers.
"Following the rescue package for the German lender Hypo Real Estate, I held talks with bank managers and the supervisory authorities and we came to the conclusion that we need systemic solutions."
Could be worse
The 500bn euros ($687m; £390m) rescue package is similarly structured to the bail-out announced by UK Prime Minister Gordon Brown.
It includes 400bn euros to guarantee interbank lending and 80bn euros to recapitalise banks, in return for equity stakes.
In addition, 20bn euros will be set aside in the German budget to cover potential losses from loans.
The aim is to encourage banks to start lending to each other again and restore investor confidence.
The loan guarantees would run until the end of next year.
A bill implementing the plan is to be rushed through Germany's two houses of parliament by Friday.
It is a tight deadline.
But despite the sense of impending doom, the government still thinks Germany is better off than other EU countries.
"We are facing some problems, but look at the situation in Britain," Mr Steinbrueck says.
"We don't have to nationalise banks. We want to help banks with a guarantee so that the provision of liquidity gets moving, and we want to recapitalise banks.
"The guarantees don't cost public money, but we are financing the stabilisation fund, which amounts to 100bn euros, so I can't rule out any costs to the taxpayer."
Mr Steinbrueck describes the bail-out as essential and in the interests of ordinary Germans.
"A robust financial sector is vital for the public good," he says.
"It's crucial for the financing of the pension system, for small and medium-sized companies and for local councils - they all need a well-functioning credit market.
"We need to restore confidence in the markets. We are not just giving some grants to bank managers. We have to support the financial sector because it's important for everyone."
Mr Steinbrueck pledges to crack down on bank managers' pay and says that banks seeking capital help will have to comply with conditions set by the government.
"We would like to have some influence whenever taxpayers' money is being invested," he says
"We want to control the salaries and bonuses of managers and I don't think that banks should offer dividends to shareholders for a period of time.
"If banks want to be recapitalised by the fund, then they will have to meet their obligations. They have to offer some goodies for the public."
News of the rescue package cheered investors and share prices rebounded.
Germany's Dax index of leading shares rose 11.4% on Monday, adding another 5% by early afternoon on Tuesday - in stark contrast to last week's turmoil which knocked almost a fifth off the value of stock markets.
But there are growing signs that the credit crisis has already damaged Europe's largest economy.
Some German carmakers have recently announced that they are suspending production.
The economy contracted in the second quarter of 2008 and another contraction in the third quarter would bring a recession to Germany.
Mr Steinbrueck is gloomy about the outlook.
"There's no doubt that economic figures will decline," he says.
"We are facing very bad times and downside risks.
"The situation in 2009 could be worse than we envisaged, and we will have to cut our forecast for economic growth."
On Tuesday, a group of leading institutes painted a gloomy picture of the German economy.
In their report, the four institutes said the German economy is on the "brink of a recession" and they scaled back their 2009 growth forecast to 0.2%.
Sigh of relief
The rescue package will amount to some 20% of Germany's gross domestic product.
Such is the scale of the scheme that the government now says it is unlikely that it will fulfil its aim of balancing Germany's budget by 2011.
Tax-cuts will also not be on the cards. Some of the regional governments, or Laender, have expressed their reservations about the bail-out, claiming that their budgets are already stretched.
But Chancellor Merkel's government is determined to push through the mammoth rescue plan as quickly as possible and the markets are breathing a sigh of relief.
The only question is whether all this frenzied activity will pay off in the long-term.