It was a race against time to avert a financial disaster with unpredictable consequences. Late on Sunday night, top officials from Germany's Bundesbank central bank, financial watchdog BaFin and executives from the country's main commercial banks agreed to a new rescue package for troubled Munich-based mortgage lender Hypo Real Estate.
The financial sector agreed to provide an extra €15 billion ($20.4 billion) in liquidity for HRE on top of the €35 billion they had already committed together with the Bundesbank in a package hammered out a week ago, the Finance Ministry said.
"With this commonly forged solution, (Hypo Real Estate) will be stabilized and thereby the German financial marketplace strengthened in difficult times," the ministry said.
The leading banks had pulled out of the first public-private rescue plan when new problems came to light during the last week, prompting them to complain that Hypo Real Estate would need liquidity guarantees of more than €50 billion to survive.
HRE says it got into trouble because its Dublin-based unit Depfa had been suffering liquidity problems due to the global financial crisis which was making it impossible to refinance its debts. The need for additional help on top of the first rescue package emerged last week.
Despite the HRE rescue, the German stock market fell sharply on Monday, tumbling 5.7 percent to 5,466 by midday to hit the lowest level since July 2006. Shares in HRE slumped 36 percent to €4.82. Bank share prices across Europe fell.
Earlier on Sunday, the German government took the surprise step of announcing that it would guarantee private deposits to help restore confidence. "We say to savers that their deposits are safe," Chancellor Angela Merkel told a news conference in Berlin.
The move was a surprise because German officials had criticized Ireland for taking a similar step last week. Greece has also guaranteed savings deposits. The Finance Ministry said the guarantee would cover more than €500 billion. The Süddeutsche Zeitung, however, indicated there was some confusion about the number with the Bundesbank estimating that private households in Germany have as much as €1.6 trillion in savings.
"This is an important signal so that things calm down and excessive reactions are avoided that would make the current crisis tackling and prevention effort even harder," German Finance Minister Peer Steinbrück said.
Germany's move on private bank deposits has put the British government under pressure to follow suit. The United Kingdom's finance ministry said it was studying the German guarantee.
UK banks have complained that Ireland's guarantee is distorting competition because it favors Irish banks operating in the UK market. Those banks are now attracting deposits because the Irish government is underwriting them.
German Finance Ministry spokesman Torsten Albig stressed that the new deal to rescue HRE would not lead to any fresh burden on taxpayers.
Earlier, Steinbrück expressed exasperation at the management of HRE, which discovered new refinancing problems that made the €35 billion rescue agreed last week insufficient.
"The federal government refuses to be forced into some sort of shared responsibility by (HRE) or to put the entire burden of the risks on taxpayers," Steinbrück said at the start of Sunday's talks.
Meanwhile politicians from Merkel's Christian Democrats and from the opposition Greens called on HRE Chief Executive Georg Funke to resign.
"Anyone who first says €35 billion and then says it's €50 billion isn't a competent negotiating partner," the parliamentary party's finance policy spokesman Otto Bernhardt told Bild newspaper.
Hypo Real Estate is one of the most important players in the German Pfandbrief covered bond market. Such bonds are regarded as especially safe because they are either guaranteed by the state or backed by cash flows from real estate, depending on the type of Pfandbrief bond. Many insurance companies have Pfandbrief investments.
There has never been a Pfandbrief default. But Germany's €900 billion Pfandbrief market, the world's largest, was at risk of drying up if HRE had gone bankrupt. The bank had issued just under €100 billion, or around €140 billion including its Irish unit Depfa. Its failure could have put Pfandbrief prices under extreme pressure because banks or investors at present wouldn't be prepared to take over HRE's Pfandbrief portfolio.
Bundesbank President Axel Weber warned German lawmakers last week that a collapse of HRE may have caused the collapse of payments transtactions across Europe. That means companies would have been unable to transfer money, employees wouldn't receive their salaries, cash dispensers would run dry.
This was a stark warning from Weber, who on Sept. 15, shortly after the collapse of Lehman Brothers, told German television that concerns about the stability of the German financial system were "completely unjustified."
cro -- with wire reports