Merkel advisor defends 100-billion-euro HRE rescue at inquiry

Aug 19, 2009, 16:51 GMT

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Berlin (dpa) - German government insiders defended the state's bailout of ailing Hypo Real Estate on Wednesday, during the final stages of a parliamentary inquiry into last year's 100-billion-euro (141-billion-dollar) rescue of the bank from insolvency.

Secretary of State for Finance Joerg Asmussen and Jens Weidmann, advisor to German Chancellor Angela Merkel, both told the inquiry there had been no alternative to rescuing the mortgage lender.

The top-level government officials appeared before the panel a day before Finance Minister Peer Steinbrueck was due to be questioned by parliamentary opposition members leading the inquiry.

Merkel's government had announced its bail-out of HRE, parent of Germany's main issuer of covered bonds, on September 29, two weeks after Lehman Brothers of New York filed for bankruptcy.

Asmussen and Weidmann both said no errors had been made ahead of the bail-out, and said there had been no indications that problems at the bank threatened its very existence.

The ailing bank has now been nationalized and is being propped up with financial aid to the tune of 102 billion euros, of which 87 billion euros have been supplied by the state.

The inquiry, consisting of opposition politicians from the Free Democrats (FDP), Greens and Left Party, contends that the government acted irresponsibly and put taxpayer money to bad use.

Asmussen's appearance had been eagerly anticipated, as the opposition considers him to carry the bulk of the blame for a costly state bail-out and had called for his resignation.

The German Central Bank, industry supervisors and private banks had all defended Asmussen in front of the parliamentary panel.

Asmussen maintained that he had not acted negligently and had not entered last year's crisis talks unprepared. Government aims had been to stabilize the financial markets and demand of the banking industry the highest possible contributions to the rescue of HRE.

'I think we achieved that,' the secretary of state told the inquiry.

Weidmann justified the government's late response to HRE's looming bankruptcy, explaining that the earlier the government intervened, the greater the banks' demands would have been.

'We wanted to extend to the maximum the banks' contribution to the financial markets,' Merkel's advisor said.

An initial decision to prop up HRE with a 35-billion-euro rescue package was reached in the last minute, in what Weidmann described as a 'successful rescue action,' even though vast additional sums were soon needed.

Financial supervisors had estimated that a collapse of HRE on the tails of the Lehmann bankruptcy could have threatened a financial market meltdown.

The political opposition to Merkel's government coalition of Christian Democrats (CDU) and Social Democrats (SDP) say not enough notice was taken by the Finance Ministry of financial ombudsman reports which mentioned HRE.

Asmussen said these reports, which never reached the top level of the Finance Ministry, would not have changed the course of events.

HRE's liquidity had been considered 'tense, but controllable,' in August 2008, Asmussen said.

'There was no reason to inform me,' the secretary of state added.

The HRE crisis showed that similar developments needed to be avoided in future, Asmussen said, adding that a better, pan-European financial supervisory body was called for.

The inquiry is due to wind up in September, when its findings will be presented imminently before Germany's general election, on September 27.