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Logo of Hypo Real Estate
Authorities fear a chain reaction on financial markets if Hypo Real Estate is allowed to go underImage: picture-alliance/ dpa

Help for Hypo

March 17, 2009

The German government is to extend guarantees for 15 billion euros in notes issued by ailing bank Hypo Real Estate as its major shareholder, US investor JC Flowers, resists plans to nationalize the lender.


The German government said on Tuesday, March 17 that it would extend guarantees for notes issued by Hypo Real Estate (HRE) until the end of the year, beyond its original end of March deadline.

Hypo Real Estate said in a statement that the guarantees collateralize the notes which were subscribed by a consortium of German banks and insurance companies.

"Our thanks go to the German government for the trust placed in our bank, as demonstrated by the extension of the credit facility," HRE's Chief Executive Axel Wieandt said in a statement.

Wieandt said the extension of guarantees for HRE was a positive sign for negotiations with Germany's Financial Markets Stabilization Fund, Soffin, for more long-term capital support.

The German finance ministry has also indicated that it was prepared to extend the term of the guarantee covering the remaining 20 billion euros of the liquidity ceiling, HRE said.

Recapitalization instead of nationalization

Hypo Real Estate suffered severe liquidity problems last September in the wake of the subprime mortgage meltdown in the United States.

The bank has already soaked up more than €100 billion euros in direct state aid and public loan guarantees.

The German government has proposed new laws that pave the way for HRE to be nationalised by seizing shares if necessary -- a taboo in Germany as it revives memories of Nazi and communist expropriations of businesses in the last century.

Christopher Flowers
Flowers came to Berlin to testify before the parliament's finance committeeImage: picture-alliance/ dpa

On Monday, the bank's biggest stakeholder, US private equity firm JC Flowers, told a German parliamentary committee that nationalizing HRE would be the wrong step to take. Flowers told the finance committee to take a stake in the bank through recapitalization instead.

Flowers holds approximately one quarter of HRE's shares, which his company bought last year for 1.1 billion euros. But according to the federal financial supervisory authority Bafin, HRE's total market capitalization currently only amounts to 190 million euros.

Flowers disputed the idea that a nationalized HRE would improve its rating. He said that he viewed the bank's future positively and expected an increase in stock price. But he admitted that it was dependent on the government.

"HRE could not survive without government support," Flowers told the committee.

Disastrous repercussions

Authorities fear a chain-reaction on financial markets in Germany and further afield if the bank is allowed to go under.

The head of Soffin warned in a newspaper interview published Sunday of catastrophic consequences if HRE were allowed to collapse.

"I'd go so far as to say, if this bank were not rescued, it could have worse consequences than the bankruptcy of Lehman Brothers," Hannes Rehm told the Frankfurter Allgemeine Sonntagszeitung.

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