Germany’s financial sector was in turmoil on Monday after Hypo Real Estate, one of its biggest lenders, had to be rescued by other banks and the government to solve a €50bn ($72bn, £40bn) liquidity crisis.
Shares in HRE plunged more than 70 per cent and other banking stocks nosedived after the intervention, the most serious sign of strain in Germany’s financial sector since the collapse of Lehman Brothers aggravated the global credit crisis this month.
HRE, one of Europe’s biggest commercial property and public sector lenders, was handed a €35bn liquidity lifeline by other German private sector banks, the Bundesbank and the European Central Bank. The lender is also selling €15bn of assets to cover its liquidity shortfall.
The rescue is likely to lead to a sale of assets from HRE’s €400bn balance sheet. Peer Steinbrück, Germany’s finance minister, 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 €35bn of credit guarantees for HRE, with the banks standing for a 60 per cent share of an initial €14bn guarantee. The government will provide the remainder of the first-loss piece and a further €21bn guarantee, meaning the state’s exposure could rise to more than €26bn.
The urgent bail-out was agreed in the early hours of yesterday with Mr Steinbrück and Angela Merkel, German chancellor, 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.”
**HRE is one of Germany’s most prominent financial companies and one of the 30 companies in the Dax index, which fell 4.2 per cent.
The rescue was organised after HRE’s inability to refinance short-term borrowing within Depfa, its Dublin-based subsidiary that lends to the public sector. HRE admitted it faced “extremely challenging conditions on the international money markets”.
Bafin, Germany’s financial regulator, and the Bundesbank said the package of short and mid-term financing would ensure the viability of the company.
Only a few months ago JC Flowers, the private equity investor, led funds investing €1.1bn 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.
Stocks of banks with substantial property exposure were also savaged, with Commerzbank and Deutsche Postbank falling 23 per cent.
A failure of HRE could also have had repercussions for Germany’s important market in ultra-safe covered bonds, or Pfandbriefe. HRE is an important issuer of such bonds.
Two Depfa executives including Bo Heide-Ottosen, a director who oversaw public sector finance at HRE, are to leave