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Germany's biggest-ever bank-rescue plan collapses

Latest update : 2008-10-05

A 35-billion-euro plan to save troubled property-lender Hypo Real Estate (HRE) fell through after a consortium of German commercial banks withdrew its support.

German bank Hypo Real Estate (HRE) said Saturday that a planned 35-billion-euro (48-billion-dollar) rescue had fallen through after the banking consortium involved pulled out of the deal.

The rescue bid was the biggest in German history and came after HRE was sucked into the global financial turmoil through its inability to refinance debt, one of many high-profile European emergency cases in the past two weeks.

HRE said in a statement that a consortium of German banks taking part in the rescue had "refused to provide liquidity lines" and that it was seeking new measures.

The property lender said it was in the process of "determining the consequences" of the consortium's withdrawal on various divisions and that it would seek other solutions.

Earlier in the day, the Welt am Sonntag newspaper said in a report to appear on Sunday that the bailout plan would have to be reworked because the bank's cash needs had been underestimated.

The biggest German Bank, Deutsche Bank, had reportedly evaluated that HRE would need 20 billion euros in fresh capital by the end of next week.

Deutsche Bank warned in addition that "by the end of the year, there will be a shortfall of up to 50 billion euros and even of 70 to 100 billion by the end of 2009," the newspaper said.

Deutsche Bank issued the warning late Friday during a telephone conference with representatives of the German banking and insurance sector, the report said.

The rescue plan had comprised an immediate cash injection by private banks and by the European Central Bank, which was to be backed by a 35-million-euro guarantee.

Most of the backing, 26.5 billion euros, was to be provided by the German government, with the rest covered by private banks.

It was announced on September 29 following weekend talks between German officials and the banks, and given the green light on Thursday by the European Commission.

The Commission had hailed Berlin's bailout plan as "part of the solution" to the current financial crisis.

HRE was hobbled by debts incurred by a German-Irish subsidiary, Depfa, which it bought in October 2007, after the international financial crisis emerged with the collapse of the US market for high-risk, or subprime, mortgages.

Depfa specialises in the financing of public works projects.

The parent real-estate bank found itself unable to refinance operations owing to a credit squeeze that worsened after the US investment bank Lehman Brothers declared bankruptcy in September.

HRE shares had lost three-quarters of their value last Monday, and though they clawed back some ground over the week, they closed on Friday at 7.51 euros, down a hefty 44.4 percent from their level one week earlier.

In Paris meanwhile, German Chancellor Angela Merkel was attending European crisis talks on the financial crisis when it was announced that the HRE rescue plan had fallen through.

Merkel had told media earlier that "each country must take its responsibilities at a national level," and added: "It is important to act in a balanced way, and for countries not to cause harm to each other."

That comment appeared to be aimed at Ireland, which has issued a blanket guarantee to bank depositors without consulting its neighbours.

Date created : 2008-10-04