Berlin backs savings, expands HRE bail-out

Business Materials 6 October 2008 04:37 (UTC +04:00)

The German government said Sunday it would secure personal deposits to prevent a run on banks and announced an expanded bail-out for troubled mortgage lender Hypo Real Estate (HRE), dpa reported.

The rescue plan for HRE is the second in the space of a week. Munich-based HRE welcomed the deal between commercial banks and the federal government to quickly lend the company 50 billion euros (68 billion dollars).

The measure supersedes an earlier, 35-billion-euro rescue plan that fell apart when other banks let their loan promises expire Saturday.

The German Finance Ministry said the financial institutions would now double their emergency loans to HRE from 15 billion to 30 billion euros. The ministry said this larger "liquidity credit" to HRE would be secured.

It will combine with previously assured loans of 20 billion euros from Germany's Bundesbank and regional central banks. HRE would be "stabilized and the German financial industry reinforced in troubled times."

The Finiance Ministry said that a combined guarantee by the banks and government worth 35 billion euros that was announced September 29 to backstop the loans would not be increased.

HRE, which mainly lends money for commercial developments and public projects such as airports and roads, is the biggest German casualty of the credit crisis that has spread from New York in the last month.

HRE fell into crisis after Dublin-based subsidiary Depfa ran out of cash. Depfa's main business is raising short-term money to lend long-term, typically to municipalities.

Urgent negotations on Germany's response lasted all of Sunday, amid warnings that financial markets would turn against Germany on Monday if the mess was not fixed.

Chancellor Angela Merkel gave no precise details of how her assurance on personal bank deposits would work, though a Finance Ministry official appeared to suggest there would be a formal legal guarantee.

An unlimited guarantee of personal current accounts, savings accounts and term deposits at German banks would be far more costly than the existing cover of up to 20,000 euros (28,400 dollars) per person.

"We are saying to women and men savers that their deposits are safe. The federal government promises that," Chancellor Angela Merkel said.

Finance Minister Peer Steinbrueck said, "I want to emphasize that we'll do what it takes to ensure women and men savers in Germany need not fear losing a single euro of their deposits.

"This is an important signal intended to bring a calming, instead of reactions that are disproportionate and make crisis resolution and crisis prevention more difficult."

On Saturday, Merkel had criticized Ireland for guaranteeing savings deposits in full, saying the European Central Bank and European Commission would speak with the Irish government to resolve the matter.

If she did mean that there will be a formal legal guarantee by the federal government as debtor of last resort, this would be a change of tack and put Britain under pressure to follow suit.

News reports said the British were asking urgently for more details.

London was dismayed when Ireland and Greece guaranteed savings, fearing that savers might shift money from British banks to those countries to benefit from the greater security, and was not expecting a German guarantee.

Government sources in Berlin said that a legal guarantee was indeed contemplated, but its value could not be calculated until banks revealed what personal deposits they were holding.

Steinbrueck said earlier that he was "outraged" at the management of the HRE group because a "further liquidity gap in billions (of euros)" had materialized.

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

Merkel said those responsible for HRE's stumble would be held accountable. Berlin "will not allow the difficulties faced by one financial institution" to damage the entire system, she said.

HRE stock is one of the 30 blue-chip shares on the DAX index.

Alternatives to a bail-out had included letting HRE collapse, as the United States did two weeks ago with investment bank Lehman Brothers, or nationalizing HRE, as the United States for mortgage lenders Fannie Mae and Freddie Mac and Britain did with Bradford & Bingley, taking over the risks.

A report by the newspaper Welt am Sonntag said the renewed crisis came after an inspection by Deutsche Bank, Germany's biggest bank, revealed that HRE needed far more short-term money than set out in the first rescue plan.

The paper said that the shortfall to the end of the year was up to 50 billion euros.

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