Hypo crisis adds to Europe's problems

Berlin/London: Germany struggled on Sunday to rescue lender Hypo Real Estate (HRE), underlining the challenge facing European leaders, who vowed to restore stability in a banking system hit by the worst crisis since the 1930s.

Officials from the government, central bank and financial regulator were meeting to discuss the plight of HRE after German banks and insurers pulled out of a state-led 35 billion euro ($48.5 billion) rescue programme agreed only days ago.

Belgium and Luxembourg were also scrambling to protect depositors and tens of thousands of jobs by finding a buyer for what remained of bank and insurance group Fortis after the Dutch nationalised the rest.

The woes of Munich-based HRE, which lends money for property projects and to governments, was a headache for German Chancellor Angela Merkel who attended the Paris summit where she said that those responsible for the crisis must contribute to resolving it.

"We are fighting for the future existence of the company," HRE spokesman Hans Obermeier said.

Neither HRE nor the banks and insurers involved had informed the government before the collapse of the rescue package, German finance ministry spokesman Torsten Albig said.

"That is certainly very surprising," he added.

The financial system in Europe has been badly hit by the fallout from a crisis which began in the US when the housing market collapsed and bad mortgage debts multiplied.

The escalating crisis has paralysed wholesale money markets, caused huge volatility on stock markets and changed the banking landscape in weeks.

Leaders of the biggest European countries met in Paris on Saturday to coordinate a response after the US authorities approved a $700 billion bank bailout to buy up toxic assets.

French President Nicolas Sarkozy, who called the emergency meeting, said governments needed to act in a coordinated manner.

But he said he had never proposed a pan-European rescue fund for banks - something Berlin had balked at when talk of it surfaced a few days ago.

"We jointly commit to ensure the soundness and stability of our banking and financial system and will take all the necessary measures to achieve this objective," the leaders of France, Germany, Britain and Italy said.

They urged the European Commission to produce legislative proposals in the near future on bank deposit insurance in the European Union and urged immediate establishment of cross-border agencies to improve supervision.

The credit crisis is one of the factors pushing many industrialised countries towards recession.

"The world economic situation is very worrying," International Monetary Fund (IMF) managing director Dominique Strauss-Kahn said.