The German government and the country’s banks and insurers boosted their bailout of imperilled real estate lender Hypo Real Estate to a massive 50 billion euros ($A83 billion) to prevent a rout on global financial markets in the next few hours. The financial industry agreed to double a credit line for Hypo Real Estate to 30 billion euros. The Government will fund the rest.

The government and the Bundesbank have said that Hypo Real Estate, Germany’s second-biggest property lender, is too big to fail.

Munich-based HRE was forced to seek the lifeline after its Dublin-based Depfa Bank Plc unit, which lends to governments, failed to get short-term funding last weekend because of the credit freeze brought on by the failure of Lehman Brothers. Depfa’s CEO, Paul Leatherdale, left the bank last Monday night, along with a senior HRE executive in Munich.

The first HRE bailout attempt failed as the leaders of the major European economies met in Paris on Saturday for high level talks on the banking crisis gripping the continent.

Twenty four hours after the Paris summit the situation in Germany had worsened to the point where the country’s government was forced to issue a blanket guarantee covering all cash and savings bank accounts held by individuals in a move to pre-empt panic withdrawals by customers in coming days.

It was a move similar to that made by Ireland a week ago, one which was later followed by Greece and then Italy. German finance ministry officials said on Sunday that the government would abolish the current legal limit that guarantees 90% of all bank deposits up to 20,000 euros.

According to media and other reports there are around 568 billion euros in German savings accounts. To put that in some perspective, HRE has a balance sheet with supposed assets of more than 300 billion euros; so the size of its rescue at close to 50 billion euros means the potential losses must threaten the entire financial system as a result. Hence the Government guarantee.

Meanwhile, In Italy the board of the country’s second largest bank, UniCredit, called an emergency meeting for Sunday to discuss moves to raise more cash from asset sales and other changes. That saw UniCredit release plans to raise up to 6.6 billion euros ($A11 billion) in fresh capital to meet concerns from investors about the strength of the lender’s finances.

The capital-raising plan includes replacing the bank’s cash dividend for 2008 earnings with 3.6 billion euros of new shares, and issuing 3 billion euros of convertible securities, UniCredit also cut its 2008 earnings forecast because of “deteriorated” market conditions.

UniCredit controls HVB, German’s second biggest retail bank. HVB spun off HRE in 2003. UniCredit shares lost 24% in the first three days of last week and then recovered, ending up 9.7% on Friday after Italian Prime Minister, Silvio Berlusconi said no would lose money from Italian banks.

That news came only hours after the 11 billion-plus euro bailout of the Fortis group by Belgium, Holland and Luxembourg was abandoned, with the Dutch Government paying 16.84 billion euros (around $A27 billion) for all the Fortis businesses in its country and leaving Belgium and Luxembourg to re-organise and refinance their bailouts. The Dutch Government cited new liquidity concerns about Fortis as being behind their shock move late Friday night, our time.

Late Sunday night, French bank BNP emerged as the buyer of most of the Belgian and Luxembourg bits. The price wasn’t revealed for Fortis Bank in Belgium, Luxembourg, the Belgian insurance operations and its Turkish banking unit. But the Belgian government is keeping a blocking 25% stake in Fortis Bank and will also retain its subprime and related assets.

Peter Fray

Get your first 12 weeks of Crikey for $12.

Without subscribers, Crikey can’t do what it does. Fortunately, our support base is growing.

Every day, Crikey aims to bring new and challenging insights into politics, business, national affairs, media and society. We lift up the rocks that other news media largely ignore. Without your support, more of those rocks – and the secrets beneath them — will remain lodged in the dirt.

Join today and get your first 12 weeks of Crikey for just $12.

 

Peter Fray
Editor-in-chief of Crikey

JOIN NOW