Britannia Radio

From The Times

April 10, 2009

Nationalisation of Hypo proposed in German plan to ease crisis

Gary Duncan, Economics Editor, and Carol Lewis

Germany unveiled plans yesterday for its first nationalisation of a bank in the postwar era as it mulled over more radical plans to create a state-backed “bad bank” to relieve its troubled banks of hundreds of billions of euros in toxic loans.

Berlin announced an offer to take over the stricken Hypo Real Estate, Germany’s highest-profile casualty of the credit crisis, confirming that it would offer investors in the group €1.39 a share for their holdings.

The offer marked a move by the German Government to deploy new powers it took this year to allow nationalisation, previously barred by constitutional law, with a view to curing the financial running sore of Hypo.

Berlin said that to allow the commercial property lender to go bust would have “substantial, barely quantifiable consequences for the national and international financial markets”.

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However, government ministers and officials are understood to be seriously considering more far-reach-ing efforts to bolster the German banking sector by creating a so-called bad bank.

Were such a scheme to go ahead, it would mark the most radical move yet by a leading economy to resolve the intractable problems of toxic debts clogging banks’ balance sheets.

A source close to the Government’s deliberations on the scheme said it was “at the stage of weighing up different ideas . . . There will be a bad bank system for Germany.”

Another individual with knowledge of the government debate said that Berlin was examining “a far more radical plan than anyone expects”.

Peer Steinbrück, the German Finance Minister, had insisted that there will be no such bad bank scheme before the German elections in September. Well-placed people played down his remarks, although infighting in Germany’s fragmented coalition government could yet undercut any move towards a firm proposal.

Under a bad bank scheme, banks laden with hard-to-trade bonds linked to past loans by institutions worldwide would hive these off into a separate vehicle, under an umbrella of state guarantees. The bad bank would aim ultimately to dispose of the currently “toxic assets, while the banks would hopefully resume more usual lending.

So far Germany’s response to the banking crisis has been patchy, but a bad bank scheme would see it going further than Britain or the United States. Britain is attempting to deal with toxic assets with a government guarantee plan.

Shares in leading German banks rose amid the speculation, with Commerzbank up more than 6 per cent and Deutsche Bank closing up more than 10 per cent.

Analysts recommended that Hypo’s investors take up yesterday’s government offer, which was €0.19 higher than the group’s closing share price of €1.20 on Wednesday.

This means that Berlin, which bought an 8.7 per cent stake in the bank less than a fortnight ago, would pay about €290 million (£260 million) to buy out the other shareholders. Investors have two weeks to tender shares.

An obstacle remains the 24 per cent stake in Hypo held by a consortium headed by Christoper Flowers, an American. JC Flowers paid €1.1 billion for its stake, or €22.50 a share. One trader said: “It’s a good deal for Hypo but a bad one for the taxpayer. However, one must assume that JC Flowers will reject the offer.”

Industrial output down

Production by industry in Germany, the factory heartland of Europe, has suffered its sharpest year-on-year plunge since German reunification in 1990, underlining the extent of the country’s economic plight. Industrial output fell by a further 2.9 per cent in February, in a sixth consecutive monthly fall that left it down by 23.2 per cent from a year earlier, fuelling expectations of a wider economic slump.