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Business

EU Questions Schröder's Latest Corporate Rescue

Just a week before federal elections, German Chancellor Gerhard Schröder announced the latest in a string of corporate bailouts, this time for MobilCom. It was a risky move, as past deals have floundered.

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A 400 million euro bailout is designed to help MobilCom stave off bankruptcy

Just a day after German Chancellor Gerhard Schröder announced a bail-out plan for the floundering mobile phone operator, MobilCom, European Union officials questioned the deal, saying it may require EU approval.

Late on Sunday – just a week before national elections – Schröder agreed to a 400 million euro ($395 million) bailout plan in the form of loans from state-run banks to stave off an insolvency filing and save an estimated 5,500 jobs. The company was teetering on the brink of bankruptcy due to France Telekom's decision to withdraw its 28.5 percent stake in the German company.

EU questions deal

But the European Union, motivated in part by MobilCom competitors in the German mobile phone market, said on Tuesday that it planned to request more information on the deal from the German government.

"This will have to be notified for examination on the basis of rules for rescue and restructuring aid," said Amelia Torres, the EU executive's competition spokeswoman, at a news conference.

"We're talking about state guaranteed loans, therefore state intervention. This is not money for research and development, this is rescue aid. State intervention business needs to be examined by the European Commission. The German government needs to get in touch with us."

Past bailout attempts

In many ways, the MobilCom bailout mirrors past attempts by Schröder to rescue large German companies on the verge of collapse – attempts that in the end failed rather spectacularly.

In 1999, Schröder brokered a deal to save the construction firm Philipp Holzmann, which had invested heavily in projects in the former East in hopes that they would provide future income.

But the predicted boom turned into a bust. In March 2002, Holzmann was once again on the verge of collapse, announcing losses of 160 million euro more than expected for 2001. And this time, Schröder let the company falter.

Just a few months later, Schröder's last-ditch effort to save the engineering group Babcock Borsig from bankruptcy also collapsed after some of its creditors failed to accept a proposed restructuring plan. Babcock employed some 22,000 worldwide and 13,000 in Germany.

Political fallout possible

"The rescue of Holzmann in 1999 was certainly seen very positively, but since that we've seen a string of firms going under, like Holzmann itself and Babcock," Klaus-Peter Schoeppner, head of the Emnid polling institute, told Reuters.

"Politicians clearly want to show they are interested, but so close to the election it could have a boomerang effect and rebound on Schröder. It's just too transparent."

Indeed, with just a slim lead in the election polls, the decision on MobilCom must have been a difficult one for Schröder. But as opposition grew – from the European Union, MobilCom competitors as well as from the Christian Democrats opposition candidate Edmund Stoiber – Schröder stood his ground.

At a campaign appearance in Leipzig on Monday, Schröder underscored his support of the MobilCom loans, saying he believes the state is responsible for helping troubled companies survive and that he thinks the company does have a chance of survival.

Stoiber's policy

Stoiber attacked Schröder's bailout plan by claiming that the government's "high" prices for the new generations of mobile licenses were too high and had led to its financial problems. But business analysts said Stoiber has actually orchestrated similar bailouts in his home state of Bavaria.

Earlier this year, Stoiber was criticized for bankrolling expansion of the heavily indebted Kirch media group through loans from the Bayerische Landesbank, which is half owned by the state of Bavaria. Kirch later filed for bankruptcy.

The economics minister of MobilCom's home state of Schleswig Holstein, meanwhile, said that Schröder's bailout plan will likely keep the company afloat for six months.

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