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BANK

Germany to buy stake in HRE bank

Germany's government will take an 8.7 percent stake in the troubled bank Hypo Real Estate, which it is seeking to nationalise, the Munich-based lender said Saturday, reporting a net loss of €5.46 billion for 2008.

Germany to buy stake in HRE bank
Photo: DPA

Germany’s national banking sector stabilisation fund SoFFin would acquire the stake as a first step and “intends to gain full control over Hypo Real Estate Group” (HRE), said a statement from the bank.

“(SoFFin) intends to take action to stabilise Hypo Real Estate Group, in the interest of stabilising the financial markets,” the statement read, “SoFFin will implement measures to achieve a sufficient recapitalisation” of HRE. SoFFin will spend €60 million buying 20 million of the bank’s shares at €3 each.

The investment would “provide the basis for the continued existence of Hypo Real Estate Group as a going concern,” said Axel Wieandt, the bank’s chief executive, in the statement.

Following the announcement, HRE also released its unaudited earnings statement for 2008, reporting a hefty net loss of €5.46 billion, due largely to write-downs on intangible assets. “This result very much reflects the difficult situation on the capital and finance markets,” the bank said in the earnings statement.

The pre-tax loss was €5.375 billion, compared to pre-tax profits of €862 million in 2007. HRE expected to make losses until at least 2011.

“The financial year 2008 reflects the impact of the general crisis on the international financial markets and the specific extremely difficult situation for the Hypo Real Estate Group,” Wieandt said.

German parliamentary deputies last week approved on a first reading legislation that would lead to a nationalisation of HRE and the expropriation of US shareholder Christopher Flowers. Flowers heads a consortium that owns 24 percent of HRE.

The government said in a statement at the time that it would “do everything possible to avoid using expropriation” of HRE investors, which would only occur as a “last resort.”

Under the recently announced share deal, however, the state pre-empts the shareholders’ right to buy the stake. The law is due to be formally adopted on April 3.

Berlin is concerned that the failure of HRE could have catastrophic consequences similar to those sparked by the bankruptcy of US investment bank Lehman Brothers in September, which hit financial markets around the world.

HRE said in its earnings statement that complex “derivative” investments with Lehman Brothers had been the main cause of a €150 million expense on its own balance sheet. It said it was also hit by losses linked to Icelandic banks, which were largely wiped out by the financial crisis last year.

HRE has already benefited from more than €100 billion in private and public aid to keep it afloat.

ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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