Bank Woes Forces Germany Into Nationalisation Law

Germany moved a step closer to nationalising mortgage lender Hypo Real Estate on Wednesday, overcoming free market qualms in the latest government intervention worldwide to tackle the financial crisis.

The German cabinet passed a bill allowing the forced nationalisation of Hypo Real Estate. U.S. private equity investor JC Flowers holds nearly a quarter of its shares.

It described the measure as a last resort to stabilise Hypo Real Estate, which has received 102 billion euros ($129 billion) in state guarantees.

But the law nonetheless breached a postwar commitment not to seize private property and highlighted how far governments are having to reassess free market principles to deal with a twin collapse in asset prices and availability of credit.

In the United States, President Barack Obama's administration unveiled a plan to stabilise the housing market, giving fresh government funding to lenders to prevent foreclosures and cash to keep homeowners in their property.

Obama is due to formally unveil the initiative at 1715 GMT.

It follows a $787 billion package of spending and tax cuts, the biggest initiative of its kind in U.S. history, which Obama signed into law on Tuesday.

The Obama administration also has to deal with new demands for funds from its car giants General Motors Corp and Chrysler LLC or risk pushing the companies into bankruptcy endangering tens of thousands of jobs.

The two carmakers, which have so far received $17.4 billion in loans, have requested nearly $22 billion in additional government loans.

They said on Tuesday they would cut jobs and idle plants in restructuring plans submitted for the bailout, and said they had reached tentative deals with the United Auto Workers union to reduce labour costs.

GERMANY AGONISES

Governments worldwide are struggling to find their own solutions to the financial crisis, while trying to avoid accusations of protectionism and state intervention that could slow global trade or undermine confidence in their economies.

In Germany, the government's new law gave it the possibility of an expropriation of Hypo's shareholders.

Other countries, including Britain and Ireland, have already seized control of banks, justifying this by pointing to the nature of the crisis and the need to protect taxpayers.

But Germany has agonised over "Enteignung" (expropriation) of shareholders, a loaded term linked in the minds of many to Nazi seizures of Jewish property in the 1930s.

In France, President Nicolas Sarkozy was trying to assuage labour unrest over his handling of the economic crisis which included a 26 billion euro ($33 billion) stimulus package that targets investment rather than directly helping consumers.

He was due to meet unions to discuss their demands for measures to protect jobs and wages, though his room for manoeuvre was limited by budgetary constraints.

The latest welter of government intervention has done little to reassure financial markets. Global share prices, as measured by MSCI's world equity index, were down on Wednesday reflecting hefty falls in Asia overnight.

Former U.S. Federal Reserve Chairman Alan Greenspan said the stock market had been hit by "a degree of fear not experienced since the early 20th century". He said if the government was unable to repair the financial system "the positive impact of a fiscal stimulus will peter out".

The euro hit a 2-1/2 month low against the dollar on concerns about euro zone banks with heavy exposure to weakening economies in Central Europe.

The FTSEurofirst 300 index of top European shares was down on worries of new credit losses in Central Europe.

"A year ago, CEOs were confessing to skeletons in the cupboard in the shape of CDOs (collateralised debt obligations) in the United States. Now the focus is turning to the east," one trader said.

Overall, investors were still heading into safe assets such as gold as worries spread the recession could drag down economies which had so far resisted the worst of the crisis.

INSTABILITY IN CHINA

In China -- which many had hoped might be able to power the global economy out of the worst downturn since the Great Depression -- a trade union official warned against "hostile forces" stirring up trouble among newly unemployed workers.

The Communist Party leadership has already expressed concerns about rural workers gathered in struggling export hubs. About 20 million jobs have been lost in southern China's manufacturing hub of Guangdong alone.

Beijing said it would increasingly use its foreign exchange reserves to support domestic growth and finance Chinese companies overseas. But it denied a magazine report quoting a senior official as saying its slowing economy meant the yuan might weaken to as low as 6.95 to 7 per dollar.

The news across Asia has been almost uniformly bad.

Japan is reeling from its worst downturn in a generation. In Taiwan, a source close to the government said GDP fell 8.36 percent in the fourth quarter of 2008.

The rare exception was in Australia where retail sales data showed a rise of 0.8 percent in the fourth quarter as shoppers took advantage of stimulus measures and falling interest rates.