German politician links Hypo crisis to Irish action

GERMAN REACTION:IRELAND'S STATE guarantee for banks aggravated the liquidity position of Dublin-based Depfa before Sunday's bailout of the bank, according to a member of German chancellor Angela Merkel's Christian Democrats (CDU).

Last weekend the German government and leading banks agreed a €50 billion guarantee for Hypo Real Estate (HRE) and its subsidiary Depfa, the latest in a growing line of German bank rescues.

After first blaming the State's financial regulator, Berlin politicians have now turned to Ireland's bank guarantee scheme, limited initially to Irish-owned banks.

"You can't save yourself and plunge other banks into crisis. But the Irish plan did that, taking away liquidity from other banking areas," said Steffen Kampeter, a CDU politician and member of the Bundestag finance committee.

"I don't think Depfa would have had the problems it did without Irish politics. I don't want to blame anyone, but one cannot invite financial institutions to a country with more favourable conditions and then say in a crisis that one doesn't want anything to do with them."

His attempt to draw a link between Depfa and the Irish guarantee was criticised yesterday by leading economists, many of whom suggested Depfa had been in trouble for at least two years with its business model of financing long-term borrowings with short-term credit.

"Depfa had bad luck because the long- and short-term interest level curves are flat, nearly the same, with no money to be made," said Dr Manfred Jäger of Cologne's Institute for Economic Policy. "One can discuss whether the Irish decision attracted increased bank deposits to Ireland but, as far as I am aware, the decision has nothing to do with Depfa."

Germany's own rescue plan - a surety on all private German savings - was defended by Mr Kampeter as a necessary measure without influence on commercial bank liquidity. He said Germany had so far avoided an all-round bank guarantee for fear it would become a "land of last resort for bad credit that banks can't get rid of anywhere else".

Asked if Germany, despite official denials, was preparing a more general bank recapitalisation scheme, he replied: "Germany is not prepared to give the impression that it is preparing measures to import other people's debt. But we have a very clear position: we will not permit any system-vital bank to go insolvent."

He suggested there was some work ahead before Berlin steps in to help private banks, such as agreement from chastened bankers for improved regulation of their industry.

"At the moment private banks are still having difficulty seeing why they should participate in their own rescue," said Mr Kampeter.

Although German banks have yet to warn of existential liquidity problems, German public opinion has tilted strongly against bank managers and any politicians who are seen to help them. Punitive measures for bailed-out bank managers are being discussed in Berlin to make the concept more palatable, including freezing pensions and stock option cash-in dates.

Some senior CDU officials have called for managers to be made liable for their own bank's losses up to the value of two years' salary