The government threw a lifeline to cash-strapped lender Hypo Real Estate on Monday in an about-face just days after its finance minister said Germany's bank system was solid. Berlin agreed to provide the bulk of 35 billion euros ($50 billion) in credit guarantees for Hypo, which is the fifth German bank to be bailed out by the state in the face of financial sector turmoil.
"This was an extremely difficult step but there was no alternative," Finance Ministry spokesman Torsten Albig told a regular government news conference in Berlin. The government said the guarantees were necessary to prevent damage to Germany, which risks falling into recession this year.
The emergency intervention scared investors, who dumped stock in Hypo, which lends money for property projects and to governments. Hypo shares were down 70.35 percent at 4 euros by 1305 GMT. "Hypo is now saved, but other banks can face similar risks," said Dirk Becker, an analyst with Landsbanki Kepler. "If markets don't normalise quickly there will be more casualties."
Under the deal, the government will team up with a consortium of banks to provide the credit, which would be divided into two tranches - a first of 14 billion euros and a second of 21 billion euros. The state would guarantee 40 percent of the first tranche and all of the second, a Finance Ministry spokesman said. The government was not planning to nationalise Hypo.
"The purpose of the whole operation is to allow an orderly winding down of Hypo Real Estate," the spokesman said. "An orderly winding down without the bank's assets being burned up." Hypo, however, said there were no plans to wind down or break up the group but that it had agreed to reduce its assets.
"Hypo Real Estate Group will not need to go back to the unsecured money market for its refunding in the foreseeable future," Chief Executive Georg Funke said in a statement. A source familiar with the situation told Reuters the accord meant the lender had secured financing until the end of 2009. Hypo Real Estate declined further comment.
Hypo does not have customer deposits to fall back on as banks grow more reluctant to lend each other. This led to funding difficulties as short-term interbank financing evaporated. The credit plan is an embarrassment for the government.
Just last Thursday, Finance Minister Peer Steinbrueck blamed the United States for spawning the global financial crisis and told parliament that German banks seemed well positioned to weather the effects of the turmoil. The government-backed resuscitation of Hypo is the fifth major rescue of a bank in Germany and illustrates how more than a year after the state propped up small-company lender IKB, it is still grappling with the fallout of the markets turmoil.
The German state has rescued regional lenders SachsenLB and WestLB and also plans the same for BayernLB. The rescue of IKB alone cost more than 8 billion euros, the lion's share of which was paid by government-owned lender KfW. As a result of the credit plan, Hypo would have to write down the value of its Depfa Bank, it said. There will be no dividend for shareholders this year.
Germany's central bank, the Bundesbank, which had been involved in the discussions, said the agreement should guarantee the viability of the group. Hypo, which lends to such borrowers as Italy, Japan and Istanbul, had been especially vulnerable to the freeze in interbank lending, which worsened after the collapse of Wall Street investment bank Lehman Brothers.
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