EU to probe German rescue of HRE

8th May 2009, Comments 0 comments

Europe's top competition watchdog said it was launching an in-depth investigation of Germany’s state aid package for the ailing bank.

Brussels -- The European Commission said Thursday its competition regulators would scrutinise a German state aid package for troubled bank Hypo Real Estate (HRE), which Berlin is nationalising to keep afloat.

Europe's top competition watchdog said it was launching an in-depth investigation of the 52 billion euro (69 billion dollar) in state guarantees for the bank and the issue of 20 million new shares by a state body.

It said it had to ensure that the aid was kept to a minimum and HRE's long-term survival was ensured while minimising the distortion of competition with rival banks.

"Currently, the commission needs to undertake a deeper assessment of the plan, which requires consulting third parties," EU Competition Commissioner Neelie Kroes told journalists.

"It believes that more may need to be done to limit distortions of competition caused by the aid, especially given the large amount of aid received," she added.

HRE said in a statement that it expected the investigation to focus on whether restructuring plans were viable or not and that it would work closely with the commission, hoping for a ruling by October.

"The group is positive that it will be able to convince the commission of the viability of its future business model and, on this basis, is confident that the commission will conclude the formal investigation procedure proceedings with a positive ruling," it said.

Last year, HRE posted a massive loss of 5.461 billion euros, in large part owing to problems at its Irish unit DEPFA Bank, which suffered heavy losses on risky US investments.

It was saved by government action because officials fear that a collapse of HRE would prompt the sort of financial market chaos that followed the failure of US investment bank Lehman Brothers in September.

The German government has launched a public offer for all outstanding HRE shares in a move that could result in the first full bank nationalisation since 1949.

As of late Monday, the state had acquired a total stake of around 41 percent. The largest HRE shareholder, US investment fund JC Flowers, has opposed the deal but a recently passed law could force it to sell out.

Berlin nonetheless hopes to avoid such a radical move that could harm its image among investors, and might manage to achieve its goal by another method.


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