ANALYSIS:Hypo bailout will not help Ireland's reputation as a centre of international finance

THE FINANCIAL Regulator has been in close contact with its German counterpart in recent weeks about escalating funding troubles at German commercial property lender Hypo Real Estate.

The bank, which bought Dublin-based public sector lender Depfa last year in a €5.7 billion deal, will receive a €35 billion guarantee from the German government and private banks to save the business from collapse. Once again, a shortage of cash has forced a large bank to seek government support.

Depfa employed about 300 staff in Dublin prior to the takeover, while Hypo had about 180 Irish staff. The German bank said it would have to write down the value of Depfa as a result of the rescue plan and that there would be no dividend for shareholders.

The regulator declined to comment, although regulatory authorities in Dublin are thought to view Hypo as a German problem given that the bank's headquarters are based in Germany and the bank's funding difficulties fall under the remit of the German regulator.

The Irish regulator would likewise view any problem arising in an overseas subsidiary of an Irish-headquartered bank as an Irish regulatory problem. Despite this, the regulators have increased contact in recent weeks and they have kept in touch with the bank, monitoring its liquidity arrangements on a regular basis.

This isn't the first time the regulators have worked closely over a faltering financial institution with businesses in both countries. In 2007 German regional bank SachsenLB was rescued by the German state in a €17.3 billion deal over losses racked up at its Dublin subsidiary.

Hypo seemed to blame its problems on Depfa, saying it had been forced to seek the credit line from the German government after the Dublin-based bank ran into problems securing short-term funding.

This will not help Ireland's reputation as an established centre of international finance.

Two Depfa board members, Bo Heide-Ottosen and Paul Leatherdale, resigned yesterday.

Financial sources in Dublin noted that Depfa was recently assigned a higher credit rating - an indication of its capacity to pay its debts - than its parent Hypo by rating agency, Standard Poor's.

The agency said Hypo's capital strength, a measure of its capacity to deal with unforeseen losses, had "come under pressure" following the Depfa acquisition, combined with risky credit investments.

That pressure, it seems, grew too great yesterday and Hypo became the fifth German bank to seek a state bailout due to the international financial turmoil.