The World from Berlin 'If One Major Bank Collapsed, Others Would Fall Like Dominoes'

German regional bank HSH Nordbank has been saved from collapse through a bailout by the states of Schleswig-Holstein and Hamburg. Observers warn, though, that the states may be entering into an unknown risk they are ill-equipped to handle.

Schleswig-Holstein Governor Peter Harry Carstensen and Hamburg Mayor Ole von Beust looked relaxed and confident Tuesday when they announced their states' joint rescue package for the troubled regional lender HSH Nordbank. But many observers are asking if the duo really knew what they were getting into.

Will the bailout of HSH Nordbank cause Schleswig-Holstein to go bankrupt?

Will the bailout of HSH Nordbank cause Schleswig-Holstein to go bankrupt?

The €13 billion ($16.7 billion) bailout poses huge risks for the two states, especially Schleswig-Holstein which is already heavily in debt. Many are asking how two states which have annual budgets of €12 billion (Schleswig-Holstein) and €10 billion (Hamburg) can afford the massive rescue package. Some are going as far as to warn that Schleswig-Holstein may even go bankrupt.

"The problem is not just that this rescue package greatly exceeds the economic capacity of Schleswig-Holstein," Hans-Peter Burghof, a banking expert at Hohenheim University, told SPIEGEL ONLINE. "There is also no convincing future plan for the bank." He also fears that the bank's capital needs will continue to increase in the coming months, meaning that even more money will have to be spent propping up the bank.

Under the rescue plan, HSH Nordbank is to receive a capital injection of €3 billion from the state of Schleswig-Holstein and the city-state of Hamburg, which each hold about 30 percent of the Hamburg-based bank. The bank will also receive a credit guarantee worth €10 billion.

HSH Nordbank, which specializes in financing the shipbuilding industry, had posted a pre-tax loss of €2.8 billion in 2008 as a result of the global financial crisis. As part of a major restructuring, the bank now plans to focus on its core business activities, such as ship financing and corporate clients, and spin other businesses and toxic assets off into a so-called "bad bank." It is also planning to cut around 1,100 jobs from its staff of over 4,000.

Experts agree that there was no alternative to the bailout. The collapse of US-based bank Lehman Brothers showed the domino effect that can be caused if a financial institution fails, Burghof said. "The stock market turbulence which was triggered by that collapse wiped out 30 percent of global equity capital. We can't risk that again."

Opposition politicians demanded a change of course for Germany's Landesbanken, as the country's state-backed regional banks are known. "It can't just be a question of carrying on with business as usual," Green Party deputy floor leader Christine Scheel told the newspaper Frankfurter Rundschau. "Risky deals in the US, like those which were also carried out at HSH, must be ruled out in the future."

Otto Fricke from the business-friendly Free Democratic Party said that the current dire position of HSH and other banks was partly a result of the conviction on the part of state governments that they "absolutely wanted to play with the big boys." Fricke said regional banks should now concentrate on their traditional role of promoting regional business, rather than speculating in risky assets.

HSH Nordbank is merely the latest in a series of German regional banks that has had to be bailed out by state governments. Bavaria had to provide a cash injection of €10 billion for its regional bank BayernLB, while North Rhine-Westphalia and Baden-Württemberg each had to provide €5 billion for WestLB and LBBW respectively.

Commentators writing in Germany's main newspapers Wednesday mostly agree that there was no alternative to the bailout but warn of the huge risk the states are taking.

The center-right Frankfurter Allgemeine Zeitung writes:

"Schleswig-Holstein and Hamburg are not bankrupt yet -- unlike their regional bank HSH. To rescue their bank, the two states must make a capital injection of €3 billion euros and provide a guarantee worth another €10 billion. Is there no end to the banking debacle? Not in the near future. More rescue missions will be needed ..."

"Perhaps in the case of HSH, one should let a bank fail for once, instead of claiming that every institution is absolutely essential to stop the system from collapsing. After all, everyone knows that many of Germany's regional banks are superfluous. Of course, it's the taxpayer who foots the bill in the end."

The Financial Times Deutschland writes:

"It cannot be ruled out that the states' plan will work and that the €13 billion in capital and guarantees, which they are spending on HSH Nordbank via a new special purpose entity, does not end up burdening their budgets. The prerequisite is, however, that the bank once again manages to pay out dividends by 2011 or 2012, or that investors can be found for parts of the business."

"Politically, the only advantage of the model chosen by the states is that there will not be any costs imposed on the states' budgets in the short term. However it is not possible to eliminate risk entirely with their daring gamble. The risk is merely postponed until the future -- despite the fact that Germany's states have recently committed themselves to following sound fiscal policy and refrain from new borrowing."

"While it is premature to call Schleswig-Holstein's solvency into doubt, as many a politician in (Schleswig-Holstein state capital) Kiel is now doing, because the bank bailout could overwhelm the weak state, it can not be ruled out that precisely this problem will arise in a few years' time."

The center-left Süddeutsche Zeitung writes:

"The states are playing for time (with the bailout). With the new cash injection, the states are buying the luxury of being allowed to have hope. Hope that the core businesses of shipping, transportation and small- and medium-sized companies, which HSH now plans to focus on, will not collapse. Hope that the global economic climate improves. And hope that the additional €70 million in interest, which Schleswig-Holstein alone will have to pay annually for the debt-financed bailout, will be covered by HSH's new business model by 2011 at the latest."

"The government in Schleswig-Holstein no longer has any other options except for crossing their fingers. They were already heavily in debt before the HSH crash. … With €1.5 billion, the state could pay for all its schools, teachers and police for one year. … The state's citizens should help by crossing their fingers too."

The left-leaning Die Tageszeitung writes:

"With their rescue plan for HSH Nordbank, Hamburg and Schleswig-Holstein are taking a big risk: They are shouldering a package that they cannot afford. But there is no alternative to the high-risk rescue plan. The collapse of Lehman Brothers showed the kind of chain reaction that can be unleashed when a bank goes under. Such a domino effect would be unavoidable in the event of a total collapse of HSH Nordbank, at least on the regional level. The consequences for the economy, and for the budgets of Schleswig-Holstein and Hamburg, would be incalculable."

The conservative Die Welt writes:

"In recent weeks, politicians often liked to see themselves as the saviors of the German financial sector. People lost sight of one important fact, however: As the owners of the public banks, the elected representatives bore at least as much of the responsibility for the debacle of the German banking sector during the financial crisis as their private competitors. The costly rescue of HSH Nordbank demonstrates the failures of the country's politicians even more clearly."

"Due to a lack of viable business ideas, the states got their banks to play Monopoly (i.e. by speculating on risky assets). The taxpayer now has to foot the bill -- because if just one of the major banks was allowed to go bankrupt, others would fall like dominoes. The financial system -- and not just in Germany -- would finally collapse."

With reporting by Susanne Amann.

-- David Gordon Smith, 1 p.m. CET


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