GERMANY HAS raised the ire of European competition commissioner Neelie Kroes for failing to inform her about a government-backed €35 billion rescue package for Hypo Real Estate (HRE) bank.
Shares in HRE, Germany's second-largest property lender, tumbled more than 70 per cent yesterday after it emerged that the federal government had organised credit guarantees for the bank late on Sunday evening.
The realisation that Wall Street turbulence had reached Frankfurt dragged German stocks down 4.2 per cent yesterday to an eight-month low. HRE is one of Germany's most prominent financial companies and one of the 30 companies in the Dax index.
"The new credit facility is a far-reaching and innovative approach which allows us to adjust our funding structure in order to accommodate the current malfunctioning of the international money markets," said bank chief executive Georg Funke.
He said the group, which has total assets of €395 billion and 1,900 employees, would have to take an unspecified writedown on goodwill of Depfa and scrap its dividend. "Hypo Real Estate Group will not need to go back to the unsecured money market for its refunding in the foreseeable future."
The group's problems stem from its acquisition last year of Depfa last year for €5 billion.
That bank, based in Dublin's International Financial Services Centre (IFSC) for a decade, specialises in lending to public-sector borrowers worldwide, which it funds by borrowing money last-minute in wholesale markets. Customers include borrowers in Italy, Tokyo and Istanbul.
The credit crisis has made it a struggle to raise such funds on the market, even more so since the collapse last week of Lehmann Brothers and the rescue of insurance group AIG. Unlike its bigger rivals such as Commerzbank, HRE does not have any customer deposits to fall back on as banks grow increasingly reluctant to lend to each other.
German finance minister Peer Steinbrück said yesterday it was "impossible" to say how much of the emergency credit line would be needed, but that Berlin's finances "had the scope" to cope with the burden.
The federal government is providing €20 billion of the credit line, with another €15 billion made available by commercial banks.
The lender is also selling €15 billion of assets to cover its liquidity shortfall. A provision in the agreement allows for a further €95 billion if needed.
The rescue is likely to lead to a sale of assets from HRE's €400 billion balance sheet.
Mr Steinbrück said HRE's remaining businesses would be placed in a special purpose vehicle for an orderly wind-down. But people close to HRE rejected the suggestion.
The government and a consortium of German banks will underwrite €35 billion of credit guarantees for HRE, with the banks standing for a 60 per cent share of an initial €14 billion guarantee.
The government will provide the remainder of the first-loss piece and a further €21 billion guarantee, meaning the state's exposure could rise to more than €26 billion.
The urgent bailout was agreed in the early hours of yesterday with Mr Steinbrück and German chancellor Angela Merkel in telephone contact with bankers and officials meeting in Frankfurt.
A finance ministry official said: "We are walking on the edge - this is really serious. We don't know what will happen tomorrow."
Only a few months ago JC Flowers, the private equity investor, led funds investing €1.1 billion in HRE, buying almost 24.9 per cent of the bank for €22.50 a share.
Shares in HRE had fallen 74 per cent to €3.52 by the close in Frankfurt.
The rescue package, just one in a series of high-profile rescues across Europe yesterday, prompted some irritation in Brussels yesterday.
A European Commission spokesman said Berlin had acted to provide the line of credit without consulting the EU competition authorities which keep a close watch on aid given by member states in case it breaches competition guidelines.
"Even if the German authorities were of the opinion that it didn't amount to illegal state aid, it would be better if the commission can confirm this," said Ms Kroes. - ( Additional reporting: Financial Times service)
