A dose of realism is not welcome in Germany right now - the government has an election to win! But in the autumn weatch the vultures circle.
Christina
TELEGRAPH
27.8.09
German state to lend directly as second credit crunch looms
Germany could directly intervene in the credit insurance and lending markets as soon as September to head off a looming credit crunch, as it fears the economic recovery may soon falter as banks refuse to roll over loans.
By Ambrose Evans-Pritchard
The finance minister, Peer Steinbrück, said broad sectors of the German economy are in trouble even if the country has avoided a full-blown lending crisis so far.
"Conditions have become much tougher for some industries – electrical engineering, machine tools, suppliers, chemicals and shipbuilding. We have clear evidence from both small and large companies that lending is jammed.
"The banks are not stepping up to their responsibility to provide credit," he told the German paper Handelsblatt.
"Some indicators that have performed better, but... it is too early to say we have shaken off this crisis. There is still lots of risk and uncertainty, and no grounds for complacency. The fact that GDP proved better in the second quarter with 0.3pc growth is somewhat reassuring, but let's not forget the economy has shrunk 7pc from a year before."
Mr Steinbrück has now backed away from talk of forcing banks to lend, recognising they have to rebuild their capital, and shifted the focus to direct lending by the state. [We don’t seem to have grasped the simple fact that rash lending cauased the crisis and damaged the banks. Naturally cautious lending is now the order of the day. Instead of degrading the economy with QE, perhaps direct lending is the answer , though the EU will certainly try to stop it-cs]
Among likely measures are use of the state-bank KFW to make "global loans" to industry on terms that pass on the full benefit of lower interest rates, as well state aid for credit insurance and trade finance. He said the bank rescue fund SoFFin still had €60bn left for support.
While some measures have been discussed before, there appears to be a new urgency. Decisions may be made by "early September".
The comments are hard to reconcile with the a record surge in the IFO business confidence index, which jumped for a fifth month to 90.5 in August. Sentiment is racing ahead of economic hard data. [It’s very catching this irrational euphoria -cs]
Axel Weber, the Bundesbank chief and until recently the arch-hawk, last week spoke of a second wave of the credit crisis as home-grown problems come to light, triggered by ratings downgrades that force banks to put aside more capital. "The first round of disruption in the bank balance sheets from structured credit products is behind us. Now we are threatened by stress from our domestic credit industry," he said.
"They are in panic," said Hans Redeker, currency chief at BNP Paribas. "They know the money supply and credit figures coming out are going to be awful." He added that Germany's stimulus measures have put off deep problems until after the election in September. The car scrappage scheme has brought forward demand, implying a cliff-edge drop when the scheme expires. Kurzarbeit (short work) schemes that subsidise companies to keep idle workers on their books are slowly bleeding corporate balance sheets. "This has delayed the restructuring that needs to occur," he said.
Mr Steinbrück said markets are awash with liquidity again, but little is going into the real economy. "The banks evidently prefer to put their money into securities rather then granting new loans because they can get a higher return. After two years of financial crisis the gambler mentality is gaining the upper hand again."
The German authorities are deeply frustrated that so few banks have resorted to the rescue scheme to rebuild their capital base. Critics say the Bundestag imposed such stringent conditions that lenders have opted instead to rein in lending.
Mr Steinbrück said state lenders pose a "systemic risk" to German finance. Few of the regional banks have a "viable" business model.
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