“We won't allow troubles at one financial institute to affect the entire system," Merkel said on Sunday. “The German government will see to it. We owe it to the taxpayers.”
Hypo Real Estate was on the brink of collapse late on Saturday after a banking consortium withdrew from a 35-billion-euro government-backed rescue plan.
Speaking at a joint news conference in Berlin with Finance Minister Peer Steinbrück, Merkel said managers at financial institutions should be held accountable for what she termed irresponsible behaviour. The chancellor added that Germans need not fear for their investments.
Steinbrück said Hypo Real Estate has an "unforeseen liquidity gap in the billions" of euros range. He assured the government was determined to find a solution for HRE but said he was "quite appalled" that the bank's management had not revealed the extent of its liquidity crisis earlier. The minister said the government was working on an "institution specific solution" for Hypo Real Estate.
Some analysts say the bank will not last more than a few days without a rescue package, so action must be taken before the markets open on Monday.
Earlier, Germany's Die Welt newspaper reported that Hypo Estate's financing needs far exceeded the bailout guarantee. Citing unnamed sources, the paper said the bank may need as much as 100 billion euros by the end of 2009.
Hypo Real Estate became the first German blue-chip company to seek a government bailout. It ran into trouble mid-September as credit froze on international markets following the collapse of US lender Lehman Brothers.