GERMAN OFFICIALS meeting this morning to decide on whether to nationalise troubled commercial lender Hypo Real Estate (HRE) have indicated that a decision has already been made to cut loose its Dublin subsidiary, Depfa.

The Dublin bank, bought by HRE for €5 billion in 2007, will be separated from the rest of the group, according to government sources, regardless of whether a full nationalisation goes ahead.

A spokesman for the parent company in Munich declined to comment on ongoing negotiations with the German bank stabilisation fund, SoFFin. “It’s clear that Depfa is the source of the problem and it is not so difficult to remove what is standing in the way of a solution,” said one source familiar with the talks.

Berlin has not fully ruled out offering further liquidity guarantees on top of the €92 billion it has provided to the Munich bank in recent months. Depfa has been hit by problems on the short-term credit markets it uses to finance its long-term credit dealings in Dublin.

Talk of nationalisation has arisen from fears that, with its Dublin subsidiary in tow, the bank will remain a money pit for some time to come.

The chief executive of HRE has made an undisguised plea for assistance from Berlin. “Only with the federal government does Hypo Real Estate have a positive future,” says chief executive Axel Wieandt in a newspaper interview published today.

Finance minister Peer Steinbrueck has said saving HRE is necessary to maintain the stability of Germany’s mortgage-bond market. Sources close to the talks say that the largest shareholder JC Flowers is prepared to allow its 25 per cent stake to be diluted to as low as 5 per cent by the nationalisation.

The US investor group would reportedly welcome the government intervention as bringing fresh capital and long-term stability to its investment.

In the event of a complete nationalisation of HRE, JC Flowers can expect a payment from the government, but this would likely be only a fraction of the €1.1 billion the investor put into the lender.

Any nationalisation would require new legislation, as bailout regulations prohibit the state taking a stake higher than 33 per cent. In addition, company law obliges anyone holding more than 30 per cent of a company’s shares to make a bid for the rest.

The federal government in Berlin already controls 25 per cent of Commerzbank, but any nationalisation of HRE would involve buying at least a 75 per cent stake.

It is not clear at this stage what the future would hold for Depfa and its 300 employees outside the HRE group.

A source at the Munich company suggested that, once it overcomes its liquidity problems, the Dublin operation would be an attractive business.

– (Additional reporting: Reuters; Bloomberg)