German Hypo Real Estate bail-out collapses


Munich : Hypo Real Estate (HRE), the German company caught up in the wave of western bank failures, said Saturday a government-backed bail-out it was seeking had collapsed.

Support TwoCircles

The mortgage lender said assurances of loans from several other financial institutions had expired.

Newspaper reports said leading German banks had discovered that HRE’s troubles were more serious than first thought.

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

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

Munich-based HRE said it was assessing the impact on its various divisions Saturday and seeking alternatives.

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

Two German newspapers set to appear Sunday quoted unnamed sources saying major banks were backing away from the deal after taking a closer look at HRE’s problems.

The 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 70-100 billion euros.

Several hours before the HRE announcement, the Frankfurter Allgemeine Sonntagszeitung distributed a news report to other media
that the HRE bail-out was unravelling, with other banks wary of chipping in money.

The bail-out 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 guarantees backing the total were differently apportioned, with the German federal government playing backstop for 26.5 billion
euros of the total and the finance industry giving its word for 8.5 million euros.

The bail-out has caused political controversy in Germany, with some opposition groups questioning why the government is risking taxpayers funds to save HRE.

Berlin has insisted HRE might recover and the federal guarantees might cost it nothing at all.

Tense negotiations had continued till Friday before the parties said the guarantees were all in place, but even then a HRE spokesman said early Saturday the agreement had not yet been signed.

Welt am Sonntag said the financial institutions had warned they would not contribute more than agreed. Some analysts said the manoeuvring was a way of putting pressure on the government to give a bigger guarantee.

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

Welt am Sonntag said Deutsche Bank disclosed HRE’s graver shortfall Friday night during a telephone conference with bank chiefs and the two German regulatory bodies, BaFin and the Bundesbank.

HRE’s main problems are at its Depfa unit, which has its main office in Dublin, Ireland.

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.