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 Michael Smith (Veshengro)

So! Right when the IMF and the British government are trying to tell us, a short while after Germany announced that they are coming out of the recession together with France, the Bundesbank, and they know what they are talking about, puts a rather big damper on things by announcing that things are going south again, more than likely.

That, I think, should have been obvious and the fact that we are not out of the woods as yet and may not be for a very long time to come unless we change our ways.

"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".

And this after they have just claimed that they are on the up. Maybe someone should get their act together and maybe the right hand should get to know the left hand.

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. "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 recently 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 subsidizes 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 collateralized debt obligations (CDOs) and other exotica of the sub-prime era. But Mr Weber said German 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 Süddeutsche Zeitung

"All the banks, even the biggest, must strengthen their defenses. 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 signaling recovery much too early during the dot-com 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.

And that is not going to happen, I am sure, for a very long time to come. The way things look the recession is going to be a double dip and the latter one is probably going to be a very deep dip. And it could be a very long time before we will come out of the dip and back to normal, if the latter will ever happen.

What we really need to do, I am sure, is to prepare for a new way. We need a new economy and a new system and no, I am not talking about communism or such like.

Personally, I do not think that we will ever get back to how we were and nor do I think that we should try to get back to such a position. A new way is called for an the current situation could be used to lay the foundation for such a new one. Time for a serious change and a return to old values.

© 2009