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19.8.09
Germany braces for second wave of credit crunch
Germany's economics ministry is drawing up a raft of special measures with the Bundesbank to head off a fresh financial crisis, fearing that a loan squeeze by struggling banks will set off a serious credit crunch early next year.
By Ambrose Evans-Pritchard
"The most difficult phase for financing is going to be in the first and second quarter of 2010," said Hartmut Schauerte, the economic state secretary.
"We are working as a government to create instruments that can offset a feared credit crunch or any credit squeeze in sectors of the economy," he said.
Mr Schauerte said firms with weak balance sheets may struggle to roll over loans as they come due in coming months. Negotiations with banks could prove "very difficult".
State support is likely to be concentrated on boosting the capital base of German firms and providing credit insurance for exporters, perhaps to the tune of €250bn to €300bn (£256bn). "If this service fails, we are going to see dozens of credit collapses," he said.
Axel Weber, Bundesbank chief and a key figure at the European Central Bank, said over the weekend that the economy remained fragile fundamental problems in the credit system had not been resolved.
"I must warn that it is too early to talk about the end of the financial crisis. Unemployment is going to rise as 'Kurzarbeit' expires, and that could hurt consumption," he said, referring to the state scheme that subsidises firms to keep idle workers on their books.
German politicians have tended to blame the credit crisis on excesses in the US, which exported toxic debt to incompetent Landesbanken through collateralised debt obligations (CDOs) and other exotica of the sub-prime era. But Mr Weber said Germany has a home-grown problem of its own that has yet to manifest itself.
"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 through the rise in the insolvency of firms and households," he told the Suddeutsche Zeitung
"All the banks, even the biggest, must strengthen their defences. They need higher capital buffers, greater liquidity cushions, and better risk management."
While Mr Weber said Germany was resilient enough to withstand another shock, his comments are a surprise. The Bundesbank has in the past played down suggestions of an incipient credit crunch, despite warnings from the German banking association and the Mittelstand core of engineering and exporting companies.
The revelation that key government agencies are drawing up relief plans overshadowed news that the ZEW index of financial confidence has soared to the highest level in three years.
The headline index jumped from +39.5 to +56.1, although it is unclear whether this gauge tells us anything that cannot be gleaned from the ups and downs of the DAX index of Frankfurt stocks. The ZEW jumped the gun by signalling recovery much too early during the dotcom bust in 2002.
The latest surge reflects the general mood of optimism in the markets and the rebound in industrial production. The problem for Germany is that car scrappage schemes and pent-up orders for German goods built up during the freeze in global trade finance over the Winter may have disguised the underlying weakness of the economy. Unemployment is expected to rise by another million to 4.5m by late next year.
Hans Redeker, currency chief at BNP Paribas, said the credit contraction was eclipsing recovery in Europe's bond market. "At the end of the day, there is not going to be any durable recovery until we see a revival in credit," he said.
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