Chancellor Angela Merkel's cabinet has approved a new law that will allow the German government to seize control of private banks whose failure poses a risk to the stability of the financial system.
The German government wants to halt the decline at HRE
Merkel's cabinet agreed on the draft proposal on Wednesday, Feb. 18 in a bid to shore up the financial system by partially nationalizing especially troubled banks and, as a last resort, expropriating obstructionist shareholders.
"There are other options," Merkel said. "Only if they fail will the ultima ratio come into play, the last resort of a disappropriation."
The draft bill is clearly tailored to address the problems created by ailing Munich-based lender Hypo Real Estate, or HRE, a high-profile casualty of the financial crisis.
The mortgage lender has already received 87 billion euros in state guarantees over the past year but has failed to recover. And the German government has not received a single share of HRE stock despite its investment.
Merkel's cabinet agreed the draft law on Wednesday
The government plans to draw up an "emergency takeover rescue law," perhaps including fresh capital injections, for HRE by April 3. It would then be presented to a general meeting of bank investors for approval. Only if that failed, would the disappropriation option be exercised.
US private equity firm JC Flowers owns a 25-percent stake of HRE. The German government has been trying to negotiate a buy-out for the past week -- thus far without result.
Flowers purchased the stock last year for 22.50 euros a share, but share prices have since fallen to just over 1.50 euros.
The specter of socialism?
The draft law puts Merkel at odds with business leaders like Hundt
Other countries, including Britain and Ireland, have already taken control of stricken banks, justifying an expropriation of shareholders by pointing to the extraordinary nature of the global economic slowdown and the need to protect taxpayers.
But a similar move is Germany is all the more controversial because of Germany's Nazi and Communist pasts, when the state wantonly confiscated citizens' property and assets.
Merkel has tried to portray the legislation as being fully in keeping with the German tradition of the "social market economy" -- a free-market system steered by the government for the citizenry's collective benefit.
But some in the political opposition reject those characterizations.
"Expropriation is socialism, not social market economy," the head of the opposition pro-business Free Democrats, Guido Westerwelle, told AFP news agency.
But supporters say nationalization is needed to stop the downward spiral
And Germany business leaders aren't impressed either.
"I am horrified that the government wants to open up a possibility for nationalizing a bank and disappropriating investors," the president of the German Employers' Federation, Dieter Hundt, said in an official statement.
But the idea has gone down well with those on the political left in Germany.
"This sort of intelligent partial nationalization of banks is something we called for last year as part of the umbrella package to rescure the financial markets," Green Party parliamentary leader Fritz Kuhn said in a statement.
Nonetheless, should Merkel's government decide that the last resort of expropriation is indeed their only option, the result would surely be a lawsuit in front of Germany's Constitutional Court.