German bankers no longer “fighting silent battle”

Thilo Roth (Germany, AC 08-10)

 

The bad news from the economy won’t stop. While in the last couple of months mostly the US grabbed the headlines, the German economy starts to sink in this swirl of credit shortage. Up to now, German bankers had fought a silent fight with the rising difficulties of getting credits, hardly noticed outside the borders of Germany. This has, however, changed over the last month.

 

Just recently, the German government had to make a spectacular rescue of the ‘Hypo Real Estate’; the second largest property lender in Germany. €35 billion in credits were needed to save the bank and prevent a crash in debenture market. Unlike the US or Ireland the German government is not willing to give out easy credits to banks, so it only paid €26billion and made German private banks pay the rest.

There are even rumours that the German Finance minister, Peer Steinbrueck, didn’t see the grave danger of refusing to lend money. It is rumoured that only in the last minute could he be convinced not to take risks the way the US did with Lehman Brothers.

More banks have started struggling now and see it as the government’s responsibility to rescue  them with the money of German taxpayers. Managers see it as normal that the Depfa, a German bank that left for Ireland to save taxes, now should be rescued with the money of German taxpayers.

This issue raised considerably controversy in Germany, given that the German Government has recently done everything to save money, pay debts and cut spending. Should they now really pay for banks? That is the question a lot of German taxpayers ask themselves.

 

About €64 billion have been given out in form of credits to banks since the beginning of the crisis last year. That doesn’t seem much in comparison to the $700billion the US just pumped into the market, but the German government assured every German the possibility to get their saving deposits. The government would guarantee for more then 1000billion Euros, which would be without question “the highest financial guarantee in world history”, according to economist Hans-Peter Burghof. The important thing to keep in mind is that the spending of German households for 2008 is around 290 billion Euros. This would mean that in the worst case, the German government would have to spent more then three times its household spending.

Why this high guarantee? As most of the banks have lent the money away again, they might get into trouble if there were a panic reaction of their costumers and everybody wanted to get their money, like it just recently happened to some big banks like the British ‘Northern Rock Bank’. The German government wants to prevent this from happening and therefore raise the trust of the German population into the German banking system.

 

How does the German stock market react? The German investors seem to still be panicking and the German stock index ‘DAX’ sank to the lowest mark since November 2006, despite the fact that the central bank lowered the interest rates the same day.

 

The question of what the German government should do next remains unanswered. Just saving banks with credits might not be the best way to go, but nationalisation a la Iceland is not the way the German government wants to go either. Just leaving banks to the free market forces is too risky, as was illustrated in the Lehman Brothers’ case.

The hope is the endurance of the German economy, which has proven to be strong even in days of global crises. It might not just save the German government from giving out more credits, but also win from this crisis and go invigorated into the next round of this global play of the markets.

 

– United World College Student Magazine –

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