Germany's Hypo Real Estate Could Be A Bigger Liability Than Initially Estimated

October 5, 2008 8:11 a.m. EST

Berlin, Germany (AHN) - Germany's second largest property lender, Hypo Real Estate Holding AG, announced on Sunday that the government-backed rescue package worth 35 billion euros ($49 billion) has been withdrawn by a banking consortium.

"The intended rescue package involved a liquidity line to be provided by a consortium of several financial institutions. The consortium has now declined to provide the line," the firm said in a statement on late Saturday.

"The Group is now in the process of determining the consequences of this for the legal entities within the Group. Alternative measures are being investigated."

On September 29, Hypo Real Estate Group had secured the new funds designed to protect the company from the impact of the current malfunctioning of the international money markets and to avert the firm from collapsing.

The European Central Bank and the Bundesbank had decided to provide a joint support of 20 billion euros in funds, while the remaining 15 billion euros were to be provided by the banking consortium.

The reasons behind the withdrawal of unidentified commercial banks' support are not clear, but some market analyst and reports suggested that the current bailout plan will not be sufficient for the lender.

According to Germany's Die Welt newspaper, the struggling real estate lender, Hypo Real Estate, has even greater liquidity problems related to its Irish subsidiary, DEPFA Bank PLC.

Citing unnamed sources, the newspaper said the firm may require as much as 50 billion euros by the end of 2008 and up to 100 billion euros by the end of 2009.

However, it is not clear what could be the next step by Germany's government to rescue the firm after the talks between the leaders of France, Germany, Italy and the United Kingdom failed.

The leaders met in a mini-summit hosted by EU and French President Nicolas Sarkozy in Paris ahead of next week's G8 Summit in the U.S. as the subprime mortgage crisis that spilled over to European nations is deepening.

Over the last few weeks, the European authorities and regulators have taken several measures to rescue large financial firms such as Belgium's largest financial-services company Fortis NA, Britain's largest lender to landlords Bradford & Bingley PLC and Franco-Belgian lender Dexia.