Germany Says Hypo Can’t Fail, Mulls Bank Takeover Law

Feb. 2 (Bloomberg) -- Germany’s government said property lender Hypo Real Estate Holding AG is too big to be allowed to fail, as officials hold “intensive” talks on a draft law that may enable the state to take over banks.

Munich-based Hypo Real Estate, already bailed out with public funds last year, is a “systemically relevant” company and the government must ward off risks to the financial system, spokesman Thomas Steg told reporters in Berlin today. At the same time, Chancellor Angela Merkel’s coalition must deliver the “most favorable” solution for taxpayers, he said.

“Taking over stakes may make sense in specific cases if that lowers the cost to taxpayers,” Merkel said, according to today’s Bild newspaper. Steg said that Merkel had “made it clear” that the government may need to step in where institutions are in trouble.

Merkel’s coalition, which has pumped 92 billion euros ($117 billion) into Hypo Real Estate, joins governments worldwide in deliberating how best to save banks worst affected by the global credit crunch. Globally, governments have pledged $7 trillion to back banks, U.K. Prime Minister Gordon Brown said today in London. Merkel will host European leaders in Berlin on Feb. 22 to discuss changes to the global financial system, Steg said.

‘Substantial Recapitalization’

Moody’s Investors Service downgraded Hypo Real Estate’s senior unsecured debt and deposit ratings today to A3 from A2, “reflecting the expectation of a substantial recapitalization by the German government or even nationalization of the group.” It also lowered the outlook on all ratings to negative.

Hypo Real Estate shares dropped as much as 10 percent in Frankfurt trading before closing up 2 cents, or 1.6 percent, at 1.30 euros in Frankfurt trading. The shares have lost 94 percent over the last 12 months, giving the company a market value of 274 million euros.

“If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found?” Nobel Prize-winning economist Paul Krugman wrote in a column in the New York Times published today. Yet in the U.S., President Barack Obama’s administration “appears to be tying itself in knots to avoid this outcome.”

‘Possible Option’

In Germany, the Finance Ministry is exploring taking over troubled lenders as “one possible option” to “bolster an institution so it doesn’t go into insolvency,” spokesman Torsten Albig said.

The government is considering taking a stake of between 90 percent and 95 percent in Hypo Real Estate, Handelsblatt newspaper reported, citing unnamed government officials. A bill being drafted by Finance Minister Peer Steinbrueck would allow the government to take over banks if required for the stability of financial markets, the newspaper said. Investors would be compensated based on a company’s share price during the two weeks before nationalization.

U.S. investor J.C. Flowers & Co., which holds about 25 percent of Hypo Real Estate, would like to keep the government stake to 90 percent or less, Handelsblatt said, quoting unnamed people close to the investor.

The government’s commitment so far to Hypo Real Estate means it’s “not too difficult” to imagine putting the public interest above those of shareholders, Albig said.

J.C. Flowers is available for “constructive talks” and supports efforts to stabilize Hypo Real Estate, Thomas Pfaff, a German-based spokesman, said in an e-mailed statement. No German government officials have approached Flowers, he said.

Not Rushing

Steg said that Merkel’s coalition is in “intensive discussions” on how to deal with Hypo Real Estate, though no decision is expected in the next few days and the topic is not on the agenda for the next weekly Cabinet meeting on Feb. 4. The government won’t rush into a decision on the matter, he said.

“Nobody in the federal government has denied that Hypo Real Estate, along with its Depfa unit, is a systemically relevant institution,” he said.

Merkel’s government bailed out Hypo Real Estate with debt guarantees and liquidity lines after the lender’s Dublin-based Depfa Bank Plc unit failed to get short-term funding in September when credit markets seized up.

Hypo Real Estate supports Germany’s purchase of a stake in the property lender and wants it done quickly as that would give the lender enough backing to get new loans and finance its operations, Chief Executive Officer Axel Wieandt told Sueddeutsche Zeitung in an interview published on Jan. 29.