New deal struck for Hypo Real Estate

A new bailout agreement has been reached to save German mortgage and public sector bank Hypo Real Estate. The German government and a consortium of unidentified German banks have agreed to offer a lifeline of EUR 50 bn after an earlier plan was withdrawn.

Under the new deal, financial institutions will guarantee an additional EUR 15 bn on top of the EUR 35 bn already promised. Financial groups had pulled out of the bailout on Saturday after it emerged that the full extent of Hypo Real Estate's funding gap had not been disclosed (4 October). The German government is providing a guarantee of up to EUR 35 bn.

'We are very grateful for the support of all the parties. This solution ensures that Hypo Real Estate Group is stabilised, will have access to sufficient liquidity even in an ongoing financial crisis, and can continue to operate,' said Hypo Real Estate's chief executive Georg Funke, in a statement today.

However, many real estate analysts have expressed surprise that Hypo's initial credit estimate was out by as much as EUR 15 bn. 'You would expect any company negotiating with a government for survival to present an accurate account of the funds they need. That Hypo got this so wrong could be down to several factors, including an inherent problem in the methodology used,' said Dr. Harald Heim in PriceWaterhouseCooper's corporate finance team in Berlin.

The funding gap could also have been due in part to any assets bundled into special purpose vehicles (SPVs) that were subsequently taken off the balance sheet, said Georg Peisser in the corporate finance team at Deloitte. 'There have been other incidences of companies putting assets into SPVs and taking them off the balance sheet, so Hypo could have done this. However, this does create a problem with transparency,' he said.

Nevertheless, the government had no choice but to step in, said Heim at PWC. 'While it is dangerous for a government to step in in such circumstances, there really was no alternative. It's about trying to stabilise the market. But perhaps BaFin, the country's financial regulator, will now see the need to tighten up regulation in the banking sector.'

BaFin spokesman Ben Fischer said that any changes to banking regulation would have to be instigated by Germany's Ministry of Finance, although BaFin would work closely with the Ministry to implement any changes.

The bailout of Hypo follows a move on Sunday to guarantee all private German bank accounts - currently worth around EUR568 bn, in a bid to prevent panic withdrawals as fears over the global financial crisis spread to Europe´s biggest economy. The move follows a decision by Ireland last week to guarantee the liabilities of six of its banks. The Danish government also said today that it would guarantee alll bank deposits in Denmark as part of a deal with banks to set up a Dkr35bn ($6.5bn) liquidation fund amid turbulent market conditions. . Previously, deposits had been guaranteed up to DKr300,000.

Ultimately, government intervention to shore up both Hypo and the private banking sector spells good news for the real estate sector, said Sascha Hettrich, a managing partner at advisory firm King Sturge in Berlin. 'I think everyone was surprised at events surrounding Hypo this week and banks don't trust each other at the moment but the German government's double intervention will send a signal to the market that it is simply trying to restore stability and confidence,' he said.