A consortium has provided the troubled real estate lender “a major new credit facility which is designed to shield the company from the impact of the current malfunctioning of the international money markets,” a statement said. The unspecified amount was “sufficient to cover the group’s funding needs well into the future,” it added.
But hours later, the German government announced it had joined the consortium of banks. Berlin has agreed to guarantee a €35-billion ($50-billion) credit line being provided by the private banks after emergency talks over the weekend, government spokesman Ulrich Wilhelm said.
“With the decision of the government to cover risks taken by the private banks for the rescue of Hypo Real Estate a spreading of the financial crisis to Germany was prevented,” Wilhelm said following crisis talks that carried on late into the early hours of Monday morning. “In doing this the government is also protecting all the other financial market participants from damages that without the state intervention would have endangered or could have endangered the financial system as a whole.”
“Hypo Real Estate has no private client business, but nevertheless the government by covering the system is meeting its responsibilities to protect the private savings of many people in Germany,” he said.
The German central bank and the stock market watchdog BaFin said separately that they “felt that Hypo Real Estate’s viability was thus guaranteed.” The lender had launched talks with unidentified German banks “in response to the extremely challenging conditions on the international money markets following the Lehman collapse and other market disruptions,” HRE said inreference to the bankrupt US investment bank Lehman Brothers.
But HRE shares plunged by more than 55 percent in opening trades on Monday after it had been granted the credit line. The bank’s stock shed 55.45 percent to €6.01, while the Dax index of leading shares had opened with a loss of 0.88 percent.
Banks that normally borrow money on interbank markets have seen that source dry up since the US subprime mortgage crisis erupted more than a year ago, and institutions that depended on regular refinancing of their debts have run into crisis.
The daily Financial Times Deutschland reported in its Monday edition that private German banks had been trying “feverishly” to find a way to rescue the institution, hit hard by the US subprime loan crisis that began in August 2007. The report said the bank, which is listed among Germany’s 30 blue chip Dax index companies, had fallen victim to speculation by its German-Irish unit Depfa.
The paper said Depfa had pursued long-term projects with heavy loans and generally ensured refinancing only at the last minute, which due to the current global credit crunch was no longer possible.
HRE would have to pick up the tab for the refinancing, estimated to be in the double-digit billions of euros range, according to the report. “It is highly unlikely at the present time that HRE will be able to come up with that amount,” the paper wrote ahead of the reported rescue package.
HRE operates in three sectors: commercial real estate; public sector and infrastructure finance; and capital markets and asset management.