'An Absolute Betrayal of Investor Confidence' Recession Fears Grow as Hypo Real Market Value Plummets

Fear in Germany that an expected US recession could soon arrive here is increasing following a massive drop in the share price of Munich's Hypo Real Estate, the latest German bank to get slammed by the growing mortgage crisis.


Is Germany catching America's financial flu?
AP

Is Germany catching America's financial flu?

Fears continued to grow on Wednesday that the growing financial flu in the United States caused by the subprime mortgage crisis is spreading across the Atlantic. On Tuesday, investor Hypo Real Estate saw its market value drop by a massive €2 billion, or nearly a third, one of the biggest drops ever recorded of a firm listed in the DAX index of leading German firms.

The Munich-based financial institution said it had to take a €390 million ($580 million) charge during the fourth quarter because of "the impairment of US exposure of collateralized debt obligations." The company had told investors throughout the year that it would be unaffected by the credit crunch in the US. As recently as November, HRE had been saying it had been insulated from the turbulence the lending crisis has wrought on global markets. But on Tuesday, HRE revised its expected earnings downward, trimmed dividends by a third and admitted that further writeoffs might be on their way.

Company CEO Georg Funke described the drop as a "one-time effect of a market catastrophe." Compared to other competitors who in some cases have had billions of write-offs because of the subprime lending crisis, he said his company hadn't faired so badly. He added that the company's executives had been unable to predict the strains the lending market crisis would have on their company and that there was no reason to take any actions against HRE personnel.

Critical analysts took Funke to task for both claims, saying the company should have disclosed its losses earlier and that by not doing so it had shaken investor confidence and led to a sell-off.

"There was plenty of time to prepare the market for this, but Hypo Real Estate missed its opportunity," one trader told the Berliner Zeitung. The paper also cites Konrad Becker, an analyst with Merck-Fink, describing the event as an "absolute betrayal of investor confidence."

'A Bad Joke'

The German business press deeply scrutinized Funke over Tuesday's crash. The daily Die Welt says that HRE's executives have to ask themselves why they didn't do anything to prepare the market for the coming writeoffs. It may be true that no lending institution can completely protect itself from the wide-reaching crisis, writes the Frankfurter Allgemeine Zeitung, but HRE should have done more to inform investors about its risks. The paper also calls CEO Funke's claim that it had fared relatively well a "bad joke," given that his company has just lost €2 billion in market value.

The financial daily Handelsblatt compares HRE management missteps to last summer's subprime crisis at Germany's IKB commercial bank, which required a bailout to the tune of billions backed by the state and other banks. Executives at the company last summer said they were inoculated from the effects of the subprime crisis. Days later, IKB issued a soft warning about earnings, when in fact the company was at bankruptcy's door.

The paper warns the HRE development will put bank shares under further pressure and admonishes banks that haven't yet released their year-end results to come forward quickly with any mortgage crisis-related losses.

Peter Bofinger and Wolfgang Franz, who are part of the important German Council of Economic Experts which advises the government on economic issues, warned of a heightening of the crisis later this year. "I don't expect the finance crisis to culminate until the middle of the year," Bofinger told the Berliner Zeitung.

Bofinger added that he was little surprised by developments at HRE. "The interest rate adjustments for buyers of US real estate are now coming into effect, and that is steadily increasing pressure on real estate markets."

His colleague Franz said the crisis would continue, saying the interest rate hikes on mortgages now coming into effect would "create problems for some debtors, increasing the likelihood of defaults at banks and also here in Germany" as an increasing number of Americans default on their home loans.

Meanwhile, conviction seems to be growing that the US is headed into a recession and that the effects could put the brakes on Germany's recent economic boom. Last week Goldman Sachs said the US would go into a recession in 2008, but Merrill Lynch claims it has already arrived.

"The data for the US economy points toward a consumer recession and Hypo Real Estate deepened the crisis of confidence," Carsten Klude, who heads investment at M.M. Warburg in Hamburg, told Bloomberg.

On Tuesday, Germany's ZEW research institute said investor confidence in the country had dropped for the seventh time in the past eight months, falling to a 15-year low.

"The largest risk for the development of the German economy is the danger of a recession in the United States following the financial market crisis," ZEW said in a statement. "Together with a strong euro, it might undermine exports."

dsl/dpa/reuters/bloomberg/ap

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