BERLIN (Reuters) – The German government is considering emergency measures to rescue stricken bank Hypo Real Estate that would create a short, limited window to allow it to seize control of the bank, political sources told Reuters.
The measures are controversial in Germany — which due to its Nazi and Communist past is leery of expropriating property — because they would allow the government to effectively confiscate the stock of shareholders, including U.S. investor J.C. Flowers.
The U.S. investor is part of a group that controls close to a quarter of Hypo. It bought its stake for 22.50 euros per share but they are now worth only about 1.25 euros each.
Coalition sources told Reuters at the weekend a compromise was emerging that could allow the government to squeeze out shareholders but only in the case of Hypo Real Estate by limiting the law’s validity to either June 30 or October 31.
Chancellor Angela Merkel said in a television interview broadcast on Sunday evening that a nationalisation of Hypo Real Estate could not be ruled out. She said it would only be a ‘ultima ratio’ (last resort).
“In any case, we want to have the controlling majority,” Merkel told ZDF’s Berlin Direkt broadcast, adding that would be the only way to ensure the state’s involvement in the rescue ends up being “as cheap as possible”.
She said insolvency was not an option.
“We have made an international commitment: We won’t do that,” she said.
The government is trying to work out how to help Hypo (HRXG.DE), which was rescued by a bank and government consortium with more than 100 billion euros ($129 billion) of guarantees.
Merkel’s spokesman said on Friday the government was close to finalising a draft law — expected by Wednesday — that would give it powers to seize control of struggling banks.
That would pressure Flowers to sell its stake.
The draft would extend a bank rescue law agreed last year, giving the government powers to seize control of financial institutions whose failure would pose a risk to the stability of the financial system.
In addition to drawing up the draft law, government officials have been talking to J.C. Flowers about its stake in Hypo but have yet to reach agreement with the firm.
The government has said it will not allow Hypo to fail though Merkel, a conservative who shares power with the Social Democrats, has stressed that forced nationalisation is a last resort.
Hypo Real Estate’s shares, which until late last year were part of the German blue-chip DAX .GDAXI index, have fallen by 97 percent over the last 18 months.
By Andreas Moeser
(Writing by Erik Kirschbaum and John O’Donnell; Editing by Jason Neely)