10 September 2008

Germany's WestLB under attack from Brussels

Competition Commissioner Neelie Kroes is threatening to force Germany's troubled WestLB to repay billions of euros of public bailout money if it doesn't “significantly improve its restructuring package”.

Competition Commissioner Neelie Kroes is threatening to force Germany's troubled WestLB to repay billions of euros of public bailout money if it doesn't “significantly improve its restructuring package”.

 

The European Commissioner for Competition, Neelie Kroes, is not known for shirking confrontation. But recently, she has been even more combative than normal. "You can be sure that this restructuring program isn't going to work," Kroes told the business daily Handelsblatt in a recent interview, speaking of efforts by the German bank WestLB to keep its head above water. In brackets, the paper wrote that Kroes was even laughing as she spoke.

 

Then came the threat: "WestLB is running out of time," she said. If the bank doesn't significantly improve its restructuring package, she warned, Brussels won't approve the public assistance the European Union has already provided to the bank. Were she to carry out the threat, WestLB would have to pay back €12 billion to the EU.

 

WestLB is furious about Kroes' very public attack. Bank head Heinz Hilgert responded immediately in the Frankfurter Allgemeine Zeitung, telling the paper that he so far hasn't had the opportunity to present his restructuring plans to Kroes in person. It is regrettable, he said, that Kroes "speaks with the media rather than with us."

 

It is not difficult to understand Hilgert's fury -- indeed, even independent experts are appalled. Banking expert Wolfgang Gerke told SPIEGEL ONLINE that, with her assault, Kraus intended to apply blanket pressure on state-owned banks such as WestLB to be privatized. The commissioner said almost as much in a Sunday contribution in the tabloid Bild am Sonntag. Germany's state banks are "not capable of surviving without repeated injections of billions in tax money," she wrote. "The tax payer should not pay this bill anymore."

 

Given the difficulties currently facing Germany's credit markets, the timing of Kroes' attack is "notably inauspicious," Gerke said. Hans-Peter Burghof, chair of the Banking and Finance department at the University of Hohenheim, agrees, saying that the commissioner's comments contained a "significant amount of irresponsibility." He continued: "A such a point in time, disseminating such uncertainty is very dangerous. In a crisis, a solution has to be found together."

 

The financial crisis has hit Germany hard with numerous banks facing substantial writedowns. Public money was used to bail out the state-owned bank Sachsen LB as well as to prop up the wobbling IKB Deutsche Industriebank AG.

 

WestLB was likewise heavily hit as a result of the US sub-prime crisis and the resulting credit crunch. Ill-advised speculation resulted in a 2007 loss of €1.6 billion -- leading the bank to the very brink of insolvency. Earlier this year, a special investment vehicle was set up by WestLB's primary shareholders -- the state of North-Rhine Westphalia and a couple of regional savings-bank associations -- to guarantee €5 billion worth of risky investments. European Commissioner Kroes approved the public guarantee, but demanded in return that the bank be completely restructured to avoid falling afoul of competition regulations.

 

Hilgert presented a restructuring plan according to which 1,350 jobs are to be cut and the bank's balance sheet shrunk -- by as much as 30 percent -- as WestLB turns its focus back to its traditional areas of expertise. In addition, the bank continues searching for a partner for a merger with management even willing to consider a private investor. So far though, few potential buyers have stepped forward.

 

Kroes told the Handelsblatt that WestLB has to turn back to its private customers and significantly reduce its activities on the international market.

 

Bank expert Gerke fears that Kroes could very will be serious when she threatens to make WestLB repay the aid it has received, meaning the bank would have to cough up billions and would likely go belly up.

 

Such a move could have enormous consequences. In a worst case scenario, a WestLB collapse could set off a domino effect, says finance expert Burghof. Customers would begin to doubt the stability of the finance sector and may pull their money out of other banks as well, he warns. The credit crisis would thus become even worse. "In such a case, the state would have to intervene to an even greater degree," he says.

 

Most of all, though, it is the way the Commission delivered its criticism that bothers Burghof the most. Kroes' seemingly final verdict on Hilgert's restructuring program before a panel of experts has had a chance to deliver its final report speaks to an "incomprehensible arrogance" on the part of the Commission. "I don't think that the Competition Commission is the appropriate steward for bank insolvencies," Burghof says.

 

WestLB head Hilgert now has very little time left to convince Brussels that he is able to restructure the bank. The Competition Commission has set October 8 as a deadline by which Hilgert must present a new plan.

 

By Anne Seith

© Spiegel Online