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Viewing cable 09BERLIN946, WILL A CREDIT CRUNCH IMPEDE GERMANY'S RECOVERY?
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| Reference ID | Created | Released | Classification | Origin |
|---|---|---|---|---|
| 09BERLIN946 | 2009-08-05 15:13 | 2011-08-24 01:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Berlin |
VZCZCXRO5419
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSL RUEHSR
DE RUEHRL #0946/01 2171513
ZNR UUUUU ZZH
P 051513Z AUG 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 4858
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHDF/AMCONSUL DUSSELDORF PRIORITY 0234
RUEHFT/AMCONSUL FRANKFURT PRIORITY 8206
RUEHAG/AMCONSUL HAMBURG PRIORITY 0320
RUEHLZ/AMCONSUL LEIPZIG PRIORITY 0231
RUEHMZ/AMCONSUL MUNICH PRIORITY 2160
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY
UNCLAS SECTION 01 OF 03 BERLIN 000946
SENSITIVE
STATE FOR EEB (NELSON), EEB/OMA (SAKAUE, WHITTINGTON),
DRL/ILCSR AND EUR/CE (HODGES, SCHROEDER)
LABOR FOR ILAB (BRUMFIELD)
TREASURY FOR ICN (KOHLER), IMB (MURDEN, MONROE, CARNES) AND
OASIA
TREASURY PASS TO FEDERAL RESERVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL GM
SUBJECT: WILL A CREDIT CRUNCH IMPEDE GERMANY'S RECOVERY?
REF: A. BERLIN 1685
¶B. BERLIN 0593
BERLIN 00000946 001.2 OF 003
¶1. (SBU) SUMMARY: A heated debate is again raging over
whether or not the German economy is experiencing a credit
crunch. Politicians and businesses complain how hard loans
are to get, and claim that tighter credit threatens recovery
in Europe's largest economy. Others say overall credit
volumes have held up, and point to weaknesses in the wider
economy as the culprit of irregular lending activity. The
picture is in fact mixed: lending is more restrictive in some
respects, but the situation has not yet become a crisis.
This could soon change, however. German banks are struggling
under the weight of illiquid assets, and government rescue
schemes are unlikely to repair the financial sector's
fundamental weaknesses. Furthermore, Basel II requirements
and EU Commission state-aid rules are putting pressure on
banks to build up their capital base and restrict lending.
Germany's financial sector appears ill-prepared to contribute
meaningfully to economic recovery. END SUMMARY.
CRYING WOLF?
------------
¶2. (SBU) Much like December 2008 (REF A), key political
figures are warning that tight credit conditions could
jeopardize recovery from Germany's worst post-war recession.
Lamenting a credit crunch, Chancellor Angela Merkel of the
Christian Democratic Union (CDU) threatened to "have a
serious word with the banks" if loans did not increase. The
Social Democratic Party (SPD) Chancellor-candidate
Frank-Walter Steinmeier's freshly tapped economic advisor
Harald Christ said banks' reluctance to lend to small- and
medium-sized enterprises (SMEs) was endangering recovery.
Finance Minister Peer Steinbrueck (SPD) told banks they had a
"duty" to lend out funds they had acquired at historically
low rates from the European Central Bank (ECB). Much to the
irritation of Bundesbank President Axel Weber, Steinbrueck
even suggested the Bundesbank consider buying commercial
paper to get credit flowing. The Federation of German
Industry (BDI) says its members -- many of which are large,
industrial concerns -- are finding it increasingly difficult
to obtain loans. To assess the situation, Steinbrueck will
convene a meeting with banks and businesses on September 1,
2009 in Berlin.
¶3. (SBU) Others are not so sure. Gerhard Schorr, Director of
the Association of Mutual Banks in Baden-Wurtemberg,
described an "unrealistic expectation that everybody has to
receive a loan during a recession, while banking supervisors
simultaneously require banks to exercise prudence in granting
credit." According to Michael Schroeder of the Center for
European Economic Research (ZEW), "Both the absolute level
and the rate of growth of credit volume compared to the
previous year contradict talk of a credit crunch in Germany."
What is really going on?
LONELY IN THE MIDDLE
--------------------
¶4. (SBU) European Central Bank (ECB) data indicate that the
volume of German financial institutions' loans to Eurozone
non-financial corporations has in fact fallen slightly, to
931.6 billion euros in June, down from 937.1 billion euros in
May. Still, banking industry representatives told us the
real concern was the type of credit that banks were currently
issuing, not the overall volume. Financing with a maturity
"beyond five years" is relatively harder to get, according to
Carsten Gross, Director of the Association of State Banks.
Long-term lending (more than five years) increased by just
2.2 percent in the first quarter of 2009 compared to the
previous quarter, while medium-term lending (between one and
five years) increased by 8.8 percent, and short-term lending
(under a year) grew by 11.9 percent. So-called "syndicated
bonds," wherein several banks form a consortium to lend a
relatively large sum (often to large companies), are far less
available today, said Gross. In contrast, credit to domestic
enterprises and self-employed persons expanded by 5.4 percent
BERLIN 00000946 002.2 OF 003
on a year-on-year basis in the first quarter of 2009. Bernd
Brabaender, Managing Director of the Association of German
Private Banks, agreed that large loans to big companies were
down. He added, however, that the smallest of the SMEs,
which often lack collateral, are also starting to have
problems. Thomas Keidel, Director of the Association of
Savings Banks, told us that depending on the region, savings
and cooperative banks are now providing 50-80 percent of
credit to companies. Companies supplying the domestic
market, he added, are actually finding it easier to get
loans.
¶5. (SBU) Recent studies substantiate these views. The Ifo
Institute found that larger companies in Germany are having
difficulty obtaining loans for two reasons: 1) they are more
affected by the recession due to their stronger export focus,
which in turn makes banks more cautious about lending to
them; and 2) large companies are more often clients of
commercial banks and state banks, which are currently
restrictive in their lending. Large, manufacturing firms in
the automotive, chemicals and machinery sectors are feeling
the pinch the most.
¶6. (SBU) According to another study by the German Chamber of
Commerce (DIHK), tighter credit conditions and higher credit
costs are indeed affecting some companies. Almost two-thirds
of those surveyed, however, said they had experienced no
problems; some said credit conditions had actually eased.
The current lending situation, while abnormal, is actually
"not as bad" as it was during the economic 2002-2004, when
GDP shrank by far less than this year's expected 6 percent
contraction. DIHK sees problems on the horizon, however. So
far, German SMEs, which are normally self-financing and
therefore have less need to borrow, are starting to exhaust
reserves because of the downturn. Many now need loans just
to stay afloat.
BAD, BAD BANK
-------------
¶7. (SBU) While Germany's weak economy is a major factor
affecting the credit-worthiness of borrowers, other factors
are also influencing bank's willingness to lend. A leaked
report from the bank regulator Bafin estimates German banks
still have as much as 800 billion euros in hard-to-value
assets on the books, with a major share held by the ailing
state-owned banks (though the Finance Ministry put the actual
amount of truly "toxic" paper at only around 230 billion
euros). Banks are restricting certain types of lending as
they build up provisions against expected future losses.
According to Moody's, German banks are thinly capitalized,
with little more than 2 percent of equity supporting assets.
(NOTE: Under Basel II, banks developing their own bespoke
risk measurement systems may maintain lower risk capital
requirements.)
¶8. (SBU) German lawmakers recently approved a "bad bank" plan
to help rid banks of their toxic assets. The plan is
actually a revision of the Financial Market Stabilization
Act, which created the 480 billion euro bank rescue fund
("Soffin"). According to Svena Brinkmann of the Finance
Ministry's National and International Financial Market and
Monetary Policy Division, the new plan allows banks to create
institute-specific, special-purpose vehicles (SPVs), where
banks may voluntarily park assets for up to 20 years (REF B).
The plan also envisages a separate "consolidation model" for
state banks, covering the transfer of risk positions and
business divisions to liquidation institutions at the federal
or state level.
¶9. (SBU) The banks are not impressed. Bernd Brabaender told
us that while Germany's private banks officially welcome the
plan, few will sign on. The scheme has onerous conditions,
such as the 10 percent "haircut" banks take when transferring
assets to the SPV. Banks must also cap executive salaries at
500,000 euros. Most of all, there is not a genuine transfer
of risk. As a result, only the sickliest of banks -- perhaps
BERLIN 00000946 003.2 OF 003
WestLB -- will sign on. (NOTE: Commerzbank and Postbank
recently declared they would not participate.) Others will
merely lumber forward, zombie-like, weighted down by toxic
assets.
¶10. (SBU) Furthermore, the German government and Bundesbank
have resisted calls to apply U.S.-style "stress tests."
Instead, an EU-wide assessment is underway, with aggregate
results due in the fall. Results for individual banks will
not be made public, so the exercise may raise more questions
than it answers. Jens Conert, Division Head for Banking,
Ministry of Finance, told us the three participating German
banks were "not representative of the German banking sector,"
though he could not reveal their names.
OUTSIDE FORCES
--------------
¶11. (SBU) Meanwhile, German banks must contend with
restrictions from beyond Germany's borders. Basel II
requires banks to set aside additional capital when corporate
clients are downgraded. Franz-Christoph Zeitler, a member of
the Bundesbank's Board of Directors, recently warned of a
"dramatic downgrading of entire asset categories" in
2009-2010. Recognizing the tight spot German banks are in,
Finance Minister Steinbrueck tried to convince his EU
colleagues to ease Basel II rules at the recent EU Finance
Ministers meeting. He was unsuccessful.
¶12. (SBU) A further complication is EU state-aid rules. The
EU must approve certain "stabilization measures without
specific time limits, such as risk shields and capital
injections," explained Jens Conert. An example is the
state-owned WestLB. The EU Commission tied approval of a 5
billion risk shield for WestLB to a requirement to halve
total assets. Another example is the Commerzbank-Dresdner
Bank merger, backed by substantial state aid. The combined
bank is shrinking its balance-sheet from 1.1 trillion euros
to just 625 billion euros -- less than the pre-merger
Commerzbank alone. As Bernd Brabaender explained, banks are
caught between conflicting imperatives: the government wants
them to lend, but the Commission wants them to consolidate
their balance sheets.
COMMENT
-------
¶13. (SBU) With big, long-term loans relatively hard to come
by, credit conditions in Germany are far from normal. The
increased difficulty small companies are now having obtaining
credit is another worrying sign, especially since many
believed SMEs would weather the financial crisis better than
most. Current credit conditions are due, in part, to
weakness in the overall economy, which diminishes the quality
as well as quantity of credit demanded. As for the supply of
credit, Germany's financial sector is burdened with problem
assets and counter-cyclical requirements that deter lending.
¶14. (SBU) Still, it is probably a stretch to call the current
situation a "credit crunch." Rather, the real concern is not
so much the present, but the future. With no fix for the
sector's problems on the horizon, banks have little incentive
to increase lending. The fact that long-term credit is
relatively hard to get is a sign of future uncertainty.
Absent serious efforts to restore the financial sector to
health, strong economic growth will remain elusive. In turn,
slow growth (or no growth) will further weaken banks' balance
sheets, with a negative feedback loop strangling hopes for
recovery.
¶15. (U) This cable was coordinated with ConGen Frankfurt.
Bradtke