German Government Bailed Out Hypo Real Estate

Germany’s financial sector became unstable when one of its largest lenders, Hypo Real Estate (HRE), was rescued by the government and other banks to solve a liquidity crisis of €50bn. HRE is one of the biggest public sector and commercial property lenders in Europe. The rescue was made after HRE was unable to refinance its short-term borrowing within Depfa, a Dublin-based company which serves as the company’s subsidiary. HRE admits that it is facing severely challenging conditions in the international money markets.

The rescue of HRE may lead to the sale of assets from its €400bn balance sheet. Peer Steinbrück, finance minister of Germany, said that the remaining businesses of HRE will be put in a special purpose vehicle and will have an organised wind-down. To do so, a consortium of German banks and the government will underwrite credit of €35bn for HRE, having the banks standing for a 60% share of the initial guarantee of €14bn. The government will offer the remainder from the first-loss piece and an additional guarantee of €21bn, which means that the exposure of the state will rise to over €26bn.

The bailout was agreed upon through a telephone contact with officials and bankers in Frankfurt together with Mr Steinbrück and German chancellor Angela Merkel. The finance ministry stated, “We are walking on the edge - this is really serious. We don’t know what will happen tomorrow.” Only a few months after the rescue, a private equity investor, JC Flowers, led funds for investing €1.1bn HRE, purchasing almost 24.9% of the bank.