Germany's Tricky Commerzbank Merger

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He predicts that in the coming years, expansion-hungry Commerzbank will face an accumulation of bad loans from the businesses it financed.

The risks are piling up. Dresdner and Commerzbank have lent a total of €5 billion ($6.6 billion) to ailing auto industry supplier Schaeffler, and the new bank will find itself saddled with the consequences until the bitter end. Besides, the bank now faces the sharp scrutiny of the German government, which wants Commerzbank to lend as much as possible. And when thousands of jobs are on the line, the bank will come under growing pressure to keep bankruptcy candidates afloat.

Blessing plans to free up a portion of the necessary capital by selling units, including many Dresdner subsidiaries, from Bankhaus Reuschel, a private bank, to mortgage lender Allianz Dresdner Bauspar AG. "We don't want to mutate into a huge savings bank," Blessing says defiantly. Nevertheless, this impression is not far off the mark, if the bank is abandoning its operations in Japan and South America, and many other entities are also under close scrutiny.

The negotiations with the EU Commission in Brussels currently revolve around how much further the bloodletting should go. One of the subjects under discussion relates to Commerzbank's Eastern European operations, which have been among the bank's success stories in recent years.

But that isn't enough for Neelie Kroes, EU Commissioner for Competition. In a face-to-face meeting with Blessing in Brussels last week, she demanded "substantial offers" in exchange for government aid. A senior Commerzbank executive complained that Kroes apparently wants the bank to "really feel the pain."

Commerzbank will probably have to part ways with its subsidiary Eurohypo, which is sitting on assets of €300 billion. Thanks to Eurohypo, Commerzbank has been a major international player in the mortgage-lending sector.

But survival is now the name of the game, not grand strategy. Eurohypo, as Europe's biggest real estate lender, has problems of its own. About a quarter of its loans were made to borrowers in crisis-ridden countries like the United States, Great Britain and Spain, where massive defaults are still expected.

In addition, Eurohypo—much like Hypo Real Estate—has many government bonds on its balance sheet that will require value adjustment. Because this places a strain on Commerzbank's refinancing options in the long run, Blessing has imposed a strict belt-tightening regimen on the bank.

In other words, a sale prescribed by Brussels would not be the worst thing in the world. But who would buy a real estate lender in the current environment? EU Commissioner Kroes will have to give Commerzbank a lot of time to sell Eurohypo if it hopes to make even close to what it once paid for the company.

"In times of crisis, it is important not to torpedo efforts to stabilize a bank," says German Finance Minister Steinbrück, in a remark meant for Brussels. His primary concern is to bolster the capital markets' confidence in the government's bailout programs.

Despite his admonitions, Steinbrück must also take Commerzbank's future solvency into account. To repay the government bailout funds, it will have to send €1.6 billion ($2.1 billion) to Berlin each year in the future. But selling lucrative units will only reduce its ability to come up with the payments.

When Commissioner Kroes finally rubber-stamps the second bailout package after Easter, Commerzbank will have access to significant capital reserves for the immediate future. Nevertheless, Blessing does not want to rule out the possibility that Commerzbank may be force to beg Berlin for help a third time.

The marathon runner has studied the 1929 economic world economic crisis closely. When it ended, the government owned 90 percent of Dresdner, 70 percent of Commerzbank and 30 percent of Deutsche Bank, he says emphatically, with a stony look in his eyes.

Blessing, ever the pragmatist, conveys the impression that even that would be something he could live with.

Translated from the German by Christopher Sultan

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