GERMAN INDUSTRY LEADER ON THE CREDIT CRUNCH
'Bottlenecks That Give Cause for Concern'
07/20/2009 12:06 PM
Hans-Peter Keitel, 61, president of the Federation of German Industries (BDI), discusses the threat of a credit crunch in Germany and the tough work awaiting the next government, which will have to create a plan for dealing with the massive debt accrued through efforts to combat the economic crisis.
SPIEGEL: Mr. Keitel, the government in Berlin says we are experiencing a credit crunch. The banks are saying there isn't one. Who's correct?
Keitel: Both are correct. A person running a healthy business has no problem getting a short-term loan for his day-to-day business. In that sense I must even defend the banks against the occasional populist criticism. But there is trouble with loans needed by companies to finance large, long-term projects or investments. Here we are observing bottlenecks that give cause for concern. The crunch hasn't happened yet, but we are close to it.
SPIEGEL: What are you concerned about, in concrete terms?
Keitel: The financial crisis has caused banks to lose large parts of their own capital. Now, because of the growing real economic risks, they are being forced to put increasing amounts of equity capital aside to cover old and new loans. That is the mechanics of Basel II. It has reduced their scope to issue loans. But if the financial institutions only finance failsafe businesses, then that will hit the core area of German industry -- the export-oriented, highly innovative, mid-sized business sector. If lending doesn't gain momentum, I fear that by the autumn even completely healthy companies could get into difficulties that could threaten their survival -- with all the negative consequences for the economy and employees.
SPIEGEL: German Economy Minister Karl-Theodor zu Guttenberg is threatening to force banks to step up their lending if he has to.
Keitel: I think nothing of that idea. The financial crisis happened because banks entered into risks that were too great. That is why it is correct for them to now pay greater attention to their risks. But the pendulum can't be allowed to swing too far in the other direction, either. Neither state coercion nor additional state funding will help. We have made enough of that available by now. Instead I favor improving conditions for lending.
SPIEGEL: How can that be done?
Keitel: It needs to be made easier for companies to get a loan from the state-owned German development bank KfW. It would also be helpful if KfW were able to directly buy securitized loans issued by banks. Additionally, the German government should energetically push for banks to be relieved of pressure caused by the equity requirements of the so-called Basel II guideline.
SPIEGEL: If your forecast is correct, then the credit crunch in Germany will first intensify after national elections on Sept. 27. What will that mean for the next government?
Keitel: Above all, the new government will have to develop a strategy for tackling the dramatic deficits the state has run up in its fight against the financial crisis. Of course the budget needs to be consolidated. But the government must also be careful not to choke off economic growth. Only the economy can get us out of the current misery. That's why it would be a mistake to unilaterally focus on increasing taxes and contributions. If you want to speed up the upswing, you need to do the opposite -- you need to reduce the burden on those who generate growth in this society: the broad middle class and the companies.
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GROWING FEAR OF CREDIT CRUNCH
Germany Considers Forced Capitalization of Banks
07/20/2009 11:31 AM
The German government is considering forcing banks to accept state aid and partially nationalizing them in return because it's increasingly worried that Germany faces a credit crunch, the Süddeutsche Zeitung newspaper reported on Monday.
The German government is worried that the current shortage of bank credit plaguing industry will worsen later this year and is considering tackling the problem by forcibly taking stakes in banks, similar to the policy adopted by authorities in the United States and Britain, a German newspaper reported on Monday.
Not lending enough -- German banks in Frankfurt, the country's financial capital.
So far, both Chancellor Angela Merkel and Finance Minister Peer Steinbrück have rejected such mandatory aid and have allowed banks to choose whether to tap the government's bank stabilization fund set up last year.
But analysts at the Chancellery, Finance Ministry and Economy Ministry now concur that Germany is at risk of a credit crunch that could worsen the recession, already the deepest since the 1930s, Süddeutsche reported.
Businesses Report Trouble Getting Credit
At present small businesses as well as large corporations say they are having problems securing bank loans. The banks have tightened their lending because they have had to make risk provisions to cover remaining toxic assets in their balance sheets, because an increasing number of companies cannot repay their loans in the current economic downturn, and because new international balance sheet rules are forcing banks to put back more equity capital to cover their loans.
The government has argued that it's time banks boosted their lending because several of them have taken billions of euros in government aid.
The government has not decided yet whether to go ahead with forced part-nationalization, the report said. One source at an unnamed ministry said it had been a mistake to make the aid system voluntary, but others in the government remain skeptical about forced measures, arguing that major banks in the US and Britain hadn't boosted their spending either, even though their governments have taken stakes in them.
So far, the German government has taken stakes in Hypo Real Estate and Commerzbank. But more banks are expected to avail themselves of government aid in the months to come because banks are having to undergo so-called stress tests to ascertain whether they qualify for the planned " scheme, under which they can free up their balance sheets by depositing their toxic assets in separate institutions. Those stress tests could reveal new problems at banks and force them to seek government aid.
Any law entitling the government to forcibly nationalize banks could probably only be passed after the Sept. 27 federal election, the Süddeutsche report said. The government is also considering an alternative -- expanding the lending activities of state development bank Kreditanstalt für Wiederaufbau (KfW).
Merkel reiterated on Sunday that she was concerned about the lack of lending and signalled she would put additional pressure on banks to prevent a credit crunch. If loans don't increase, "the government will invite them back and have a serious word with the banks," she told ARD television.
cro -- with wire reports
THE BANKS THAT WOULDN'T LEND
Experts Warn of New Credit Crunch in Germany
By Christian Reiermann, Christian Salewski and Michael Sauga
07/20/2009 12:00 AM
Many economists are already talking about a light at the end of the recession tunnel. But a new crisis is looming in Germany as companies find it increasingly difficult to borrow money. The government is coming up with increasingly desperate ideas to get liquidity flowing again.
There was little evidence of a crisis as German Chancellor Angela Merkel hurried through a production building at Opitz Holzbau GmbH, a manufacturer of prefabricated building elements based in the eastern German town of Neuruppin, on Wednesday of last week. Production was in high gear, and the chancellor chatted with assembly workers, handed out praise and shook hands.
Idle cranes in Hamburg harbor: The economic crisis is hitting German exporters hard.
After the factory tour, Merkel and local business owners retired to a drab conference room -- and suddenly the crisis was back. The discussion revolved around banks, the slowdown in the flow of credit and the resulting cash crunch many companies are experiencing. This is the subject that is currently capturing the attention of economists, politicians, business owners and ordinary people alike.
Merkel complained that even though the government has spent billions to support the banks, there are now "massive problems with investments over €10 million ($14 million)." She said that she is gradually losing her inclination to take responsibility for the financial industry. "It's time for the banks to do their part," Merkel said.
The government is preparing for the next stage of the economic crisis. While some experts are already declaring the imminent end of the recession, Berlin's grand coalition government of conservative Christian Democrats (CDU) and the center-left Social Democratic Party (SPD) fears that the financial crisis could come to a head in the fall.
Because the banks have been reluctant to lend money, even healthy small-and medium-sized companies lack the funds for much-needed investments and future-oriented projects.
Senior officials at the Economics Ministry warn of a "serious danger," while Hans-Peter Keitel, president of the Federation of German Industries (BDI), warned in an interview with SPIEGEL that "even completely healthy companies could get into difficulties that could threaten their survival." Merkel is worried: If the prognoses prove to be correct, the weeks leading up to Germany's national elections on Sept. 27 could be filled with bankruptcy filings by firms in Germany's traditional export industries, like mechanical engineering, electronics and the automotive sector.
Even as companies threaten to go under, which would set off waves of layoffs, financial firms like US investment bank Goldman Sachs and Germany's Deutsche Bank are raking in substantial profits once again. Merkel's advisers fear that the prospect of widespread company failures could poison the mood among voters.
This concern has prompted government leaders to assign the blame for the malaise to the reluctant bankers. Lenders would rather invest the money "in the trading of foreign currency, bonds and stocks," Finance Minister Peer Steinbrück says. Economics Minister Karl-Theodor zu Guttenberg calls the banks' behavior "unreasonable," and SPD chancellor candidate Frank-Walter Steinmeier says that "healthy companies are going under, merely because banks are hording their money."
Graphic: German measures to tackle the financial crisis to date
For reasons partly of parsimoniousness and partly of misunderstood market ideology, the Merkel cabinet has designed its billions in bailout programs (see graphic) in such a way that they have often narrowly missed their mark.
For instance, the German government had expected that its €480 billion ($672 billion) financial market stabilization fund would ensure that banks with heavy losses would boost their equity reserves. But instead of requiring banks to accept the government bailout funds, as was the case in the United States and Britain, the German government made participation in its program voluntary.
The outcome was inevitable. Fearing that the public would perceive them as ailing, even banks that urgently needed the money shied away from accepting the government's capital injection.
Only Commerzbank and a few smaller institutions took the government up on its rescue offer. Meanwhile, the majority of players in the financial industry are trying to survive the crisis without any outside help, which severely restricts their ability to lend money.
The upshot of the so-called "bad bank" law, which the grand coalition hoped would enable lenders to get rid of their now worthless toxic securities, has been similarly sketchy. The Christian Democrats and the SPD spent half a year discussing one detoxification model after the next. In the end, they decided on a version whose main feature is that it minimizes the burden on the federal budget.
For financial institutions, on the other hand, the aid was tied to so many conditions that hardly any banks have wanted to participate. To date, not a single institution has submitted the relevant applications, and only three banks have even expressed their "interest" in the program. As a result, toxic securities continue to burden bank balance sheets and tie up capital which is urgently needed for loans.
The most disastrous outcome of the failed policies, however, has been the federal and state governments' inability to recapitalize Germany's troubled state-owned regional Landesbanken. After playing a larger role in the global investment casino than any other sector of the financial industry, institutions like WestLB and HSH Nordbank faced enormous losses when the crisis hit.
In Poor Shape
Experts have long recommended that if these institutions are to become viable again, unprofitable business segments will have to be abandoned and several institutions merged -- a step many governors of Germany's states are unwilling to take. Fearing a loss of control and of jobs, states like Bavaria and Baden-Württemberg are even turning down offers of federal assistance and are trying to bail out their troubled state-owned banks on their own.
The consequences have been disastrous. Because the government's cleanup efforts have been so unsuccessful, Germany's banking industry is in worse shape than that of almost any other industrialized nation. Foreign banks like the Royal Bank of Scotland have withdrawn from the German market, private banks lack the necessary capital and the ailing state-owned banks are largely incapable of lending money for investment.
Thus, it comes as no surprise that the flow of capital has stagnated. The banks increased their lending volume by 5 percent in the first quarter of this year, compared with the same period last year. But this growth stems primarily from short-term liquidity loans, an area in which banks are still eager to lend money. For long-term loans, however, which companies need for their capital investments, banks have "tightened their standards across all types of businesses and for all repayment terms," a survey conducted by Germany's central bank, the Bundesbank, concluded.
Graphic: German measures to tackle the financial crisis to date
The government is familiar with the experts' predictions. But instead of addressing the root causes of the problem, Finance Minister Steinbrück would rather resort to belligerent rhetoric. Unless the banks finally toed the line, he blustered, he would take "unprecedented measures."
Steinbrück's aggressive tone makes it all the more embarrassing that his announcements have proven to be nothing but empty threats until now. They have included the suggestion that the Bundesbank issue loans directly, and that the equity capital requirements under the Basel II rules -- international banking regulations that stipulate how much capital banks need to have -- be relaxed. But no matter what Steinbrück has proposed, he has consistently failed in the face of legal constraints and the objections of European partner countries. Are German banks in such poor shape, EU negotiators in Brussels jeered, that Berlin is already torpedoing its own regulatory ideas?
Steinbrück is now pursuing yet another plan. Officials at the Finance Ministry have prepared another version of an emergency financing plan, which calls for the government-owned KfW development bank to take action, instead of the Bundesbank. Before the crisis began, KfW and the banks through which it channels its loans onto the market each bore half the credit risk. In exceptional cases, KfW may assume 80 percent of the risk, while the other bank assumes the remaining 20 percent. In the future, however, KfW's share could be even higher, perhaps even 100 percent, according to the Finance Ministry's latest plans. The Economics Ministry is fashioning similar schemes.
Some plans are even more radical, including the possibility of KfW lending directly to businesses in the future. The funds for the new loans would come from the existing stimulus programs.
The plan could indeed benefit some cash-strapped companies, but it can hardly replace a functioning money and capital market. As Merkel has learned from her visits to small and mid-sized businesses, companies are the first to suffer when banks are not functioning properly.
Admittedly Martin Opitz, the CEO of Opitz Holzbau, was able to report to the chancellor that business is good. With its prefabricated roof trusses, some of which come with attached solar panels, Opitz is profiting from the alternative energy boom.
But Martin Opitz has also had his unfortunate experiences with the credit crunch. In May, a large bank approved a loan of €2.2 million ($3.1 million) for his company. But after spending two months calling the bank in an attempt to actually get the promised funds, he ended up going to the local Sparkasse savings bank, which lent him the money within two weeks.
Since then, Opitz has followed a simple rule of thumb. "I no longer work with large banks," he says.
Translated from the German by Christopher Sultan
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