Given the worsening financial crisis, the government may “sooner rather than later be faced with the difficulty that the survival of the bank is seriously endangered,” Steinbrueck told lawmakers in Berlin today. “We must make sure, by gaining a controlling majority, that the restructuring measures succeed.”

Chancellor Angela Merkel’s coalition is at odds over how to apply a law that allows the state to seize the Munich-based property lender. Merkel’s Christian Democrats, wary of scaring off foreign investors, favor taking 75 percent plus one share, while many of their Social Democrat coalition partners want to take 90 percent or more of the lender’s stock.

After the law has been passed in April, attempts will be made at Hypo Real’s next general meeting to carry out a capital increase and a capital writedown, said Steinbrueck, a Social Democrat. If there is no majority for that or if implementation is delayed and instability lasts well into early summer, “it can’t be ruled out that the option to expropriate will be used.”

Economy Minister Karl-Theodor zu Guttenberg, a member of the Christian Social Union, sister party to Merkel’s CDU, said he seeks “alternatives to expropriation,” WirtschaftsWoche magazine reported. An insolvency of the lender that takes account of “systemic risks” may be a preferable solution, the magazine cited him as saying.

Losing Support

Merkel’s Cabinet agreed on a draft bill Feb. 18 allowing the state to seize Hypo Real Estate as a last resort after the government granted it 102 billion euros ($129 billion) of public funds and guarantees. Christian Democrats are leery of the measures as they lose voter support to the pro-business Free Democrats ahead of Sept. 27 national elections.

“Words such as expropriation, socialization and nationalization don’t chime with the views of the CDU’s or CSU’s core voters,” Manfred Guellner, the head of polling company Forsa, told Stern magazine March 4.

Hermann Otto Solms, a lawmaker for the opposition Free Democrats, likened Steinbrueck in parliament to Venezuelan President Hugo Chavez, whose government has seized land from foreign-based companies. The Hypo law will hurt Germany’s investment climate, he told lawmakers.

“We need private capital, we need private investors, we need domestic and foreign investors who are ready to invest here, especially in the current crisis,” he said. With this law, “you’re destroying a fundamental right.”

Otto Bernhardt, Christian Democrat finance spokesman, said that the Social Democrat-run Finance Ministry is having “a change of plan undermining the principle of last resort.”

‘Change of Direction’

“This change of direction is not what we want in the CDU,” Bernhardt said yesterday in an interview. He urged changes to the draft bill in parliament today, including a more detailed explanation of the steps preceding any nationalization.

The Christian Democrats bowed to their coalition partners’ plan to allow for a forced takeover of Hypo after shareholders including J.C. Flowers & Co. LLC failed to agree on a price for selling their stock. Hypo’s shares plunged 92 percent since Sept. 25. Hypo Real fell 4.5 euro cents to 73 cents at 9:55 a.m. in Frankfurt.

Flowers still seeks a price for his stake in Hypo Real Estate that’s two to three times the current share price, Steinbrueck said. The government must make sure that it’s “not the taxpayer that’s getting expropriated,” he said.

Alexander Bonde, a lawmaker from the opposition Green Party, said Flowers is “blackmailing” Germany, behavior “that can’t be tolerated.”

‘Go Haywire’

Dirk Becker, an analyst at Kepler Capital Markets in Frankfurt, said the seizure of the bank is not inevitable. The government will initially seek the support of a majority of shareholders for a capital increase, following the letter of the draft law, Becker said in an interview.

“The point is the government wants to be forearmed if the shareholders reject the increase,” said Becker. “The financial market in Germany would go haywire. That’s why Merkel would need to act quickly with expropriation.”

Lawmakers have invited Flowers to state his case at a finance committee meeting on March 17, Bernhardt said.

Hypo Real Estate was worth more than 12 billion euros before Depfa Bank Plc, its Dublin-based unit, failed to get short-term funding in September as credit markets seized up. Its market capitalization has fallen to 152 million euros.

SOURCE: Bloomberg