Shares in Hypo jump 70% as Merkel approves draft expropriation Bill

SHARES IN Hypo Real Estate jumped 70 per cent yesterday after chancellor Angela Merkel’s government approved a draft Bill allowing it to seize control of the troubled property lender.

The Bill, yet to be approved by parliament, enables Germany to expropriate “systematically relevant” banks for the first time in its postwar history.

“We examined this very carefully and I don’t believe we have any alternative,” said Dr Merkel.

To calm markets and appease the pro-business camp in Dr Merkel’s ruling Christian Democrats (CDU), the Bill is intended only to be used with Hypo, expires on June 30th and can only be invoked as a last resort.

“The federal government will privatise the confiscated companies once more when the company has been stabilised in the long term,” said a statement. At this point, it added, former shareholders will have the automatic right to buy preference shares.

Since September, Berlin has approved loans and guarantees worth €102 billion for the Munich-based Hypo Real Estate, a financier of state infrastructure projects.

Following the collapse of Lehman Brothers, Hypo’s Dublin subsidy Depfa was unable to secure the short-term credit it uses to finance its long-term credit dealings.

As a key player in the German Pfandbrief(covered bonds) market, Berlin considers Hypo Real Estate too big to fail. But as the value of loans and guarantees required to keep it going ballooned to twice the level originally anticipated, politicians began to explore the idea of nationalisation to guarantee the taxpayer investment.

It’s an option Germany has been hesitant to use, largely because of the country’s dramatic history in the last century. The last bank nationalisation in Germany in 1931 led to a run on all banks, worsened the already grim economic situation and contributed to the Nazi rise to power two years later.

The effects of postwar expropriations by East German communists have also left their mark on the nation’s psyche.

An expropriation law could remove the biggest hindrance to full control of the bank: Hypo’s largest private investor, a consortium controlled by New York-based financier Christopher Flowers.

Last year he bought 24 per cent of Hypo at €24.50 per share. If he were to sell his shares at the current market rates, he would lose an estimated €1 billion. The expropriation law could spare Berlin politicians the wrath of angry voters in September’s general election if they were forced to buy the Flowers shares at a premium.