Germany in new bid to rescue troubled lender

6th October 2008, Comments 0 comments

Merkel: Berlin would not allow the difficulties faced by one financial institute" to damage the entire system.

Berlin -- Chancellor Angela Merkel said that her government was working flat out to save troubled German mortgage lender Hypo Real Estate (HRE).

Berlin "would not allow the difficulties faced by one financial institute" to damage the entire system, she said on Sunday, a day after HRE disclosed the collapse of a hoped-for government-backed bailout.

Speaking ahead of a meeting of her ruling coalition, Merkel said savers' deposits with the bank were safe and promised that those responsible for its difficulties would be made accountable.

The German government and the banking industry had announced on Sept. 29 a 35-billion-euro (50-billion-dollar) set of guarantees to enable HRE to resume short-term lending.

But the deal unraveled when several leading banks pulled out after discovering that the problems facing the latest lender caught up in the wave of bank failures were more serious than first thought.

A spokesman for HRE, which is listed on Germany's blue chip stock index DAX, said the group was "working around the clock" with regulators, investors, shareholders and the government.

Insurers were also expected to be asked to join in the rescue operation, which it was hoped would be in place before markets opened on Monday, sources said.

HRE, which mainly lends to commercial projects and to build public facilities, is the biggest German casualty of the crisis that has spread from New York in the past month.

The HRE spokesman said liquidity problems faced by HRE's Irish subsidiary Depfa, which triggered the current crisis, had worsened.

Depfa's business involves rounding up short-term money to lend long-term, typically to municipalities. The banking crisis meant Depfa could no longer obtain such funds.

German Finance Minister Peer Steinbrueck said Sunday that he was "outraged" at the management of the HRE group because a "further liquidity gap in billions" had materialized.

"The German government refuses to be forced into any co-responsibility by this banking institute," he said.

The original bailout required short-term credit of 15 billion euros and rolling long-term re-financing into the second half of next year totaling 35 billion euros.

The newspaper Welt am Sonntag said an inspection by Deutsche Bank, Germany's biggest bank, had revealed HRE needed far more money short term than set out in the plan.

The paper said the shortfall to the end of the year was up to 50 billion euros and to the end of 2009 it was 70 billion euros to 100 billion euros.

The bailout plan had apportioned a loan requirement of 15 billion euros to other banks and 20 billion euros to the Bundesbank, the German central bank.

The bailout has caused political controversy in Germany, with some opposition groups questioning why the government is risking taxpayer funds to save HRE.

Sources linked to the talks said the industry had initially demanded that Berlin simply nationalize HRE, as the United States did to Fannie Mae and Freddie Mac and Britain did to Bradford & Bingley.

HRE's problems are also a cause of concern for the trouble Franco-Belgian property lender Dexia, which is due to receive an injection of 6.4 billion euros from the French, Belgian and Luxembourg governments.

Media reports said the two banks had close business ties and a failure of the German rescue package could hit Dexia worse than the recent collapse of US investment bank Lehman Brothers.


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