Germany presses for bail-out, Hypo Real Estate restructure

1st October 2008, Comments 0 comments

The US lifeline was a "confidence-building measure" that would have "incredibly important meaning" for the economy, Merkel said.

Berlin -- As plans emerged to restructure a German mortgage lender brought down by the US financial crisis, German Chancellor Angela Merkel pressed for the US Congress Tuesday to pass a bail-out package.

Speaking hours after the shock rejection of the bill, she said she was confident the US legislation would be passed in the course of this week.

The US lifeline was a "confidence-building measure" that would have "incredibly important meaning" for the economy, she said in Berlin.

She also affirmed her government's own 35-billion-euro (50-billion-dollar) plan, drafted on Sunday, to bail out Hypo Real Estate (HRE), a German lender that ran out of short-term funding.

The congressional rejection sent a shiver through weak share markets.

The Frankfurt Stock Exchange's DAX index dipped Tuesday to its lowest level this year, 5658, but rallied a little amid hopes that the European Central Bank (ECB) would this week reduce interest rates.

The DAX was running Tuesday afternoon at 5724, down 1.4 percent from the Monday close.

Details were meanwhile emerging of the restructuring planned for HRE, a Munich-based company that mainly lends to hotel and office developers and public bodies building airports and roads.

Although HRE denied it would be dismantled, the government guarantee of 26.6 billion euros and a guarantee from fellow commercial banks worth 8.5 billion euros appeared to come with conditions attached.

Communications from Germany's Bundesbank central bank and bank regulator BaFin to the Finance Ministry in Berlin said a disposal of HRE's subsidiaries or other assets at full value was planned as part of the package.

This "restructuring" was designed to avoid the loss of value that would happen if HRE were to declare insolvency, but not to "unjustifiably" protect HRE shareholders' funds.

The written communications were obtained in Berlin by DPA. HRE owns four subsidiary companies and will be required to hand those assets over as security for fresh funding.

Axel Weber, president of the Bundesbank, stood at Merkel's side Tuesday and said HRE remained viable.

He said the guarantees would "avoid turmoil in the payments system." The central bank head said he also desired stability in the bonds market that supplies credit to Germany's mid-sized enterprises.

Behind closed doors, meeting Social Democrat legislators who support Merkel, he said the German interbank payments system would have crashed if HRE had not been helped.

Opposition politicians in Germany questioned the need for the HRE lifeline.

HRE stock, which plunged Monday as the 35-billion-euro bail-out was announced, traded at 4.46 euros in Frankfurt on Tuesday, up 0.9 percent overnight.

HRE, founded in 2003, is Germany's second-biggest mortgage lender. Its public-finance unit, Depfa, was reportedly caught 35 billion euros short when other lenders withheld short-term money.


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