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ECONOMY

IKB faces shareholder wrath over subprime mess

Directors of distressed German business lender IKB faced furious shareholders on Thursday who voiced anger over the management of one of the country's biggest US subprime market victims.

More than 1,000 small shareholders attended a general assembly of the bank, a former safe investment now in the midst of a storm that has had to be rescued several times from bankruptcy since August.

IKB shares have lost around 70 percent of their value over the past six months, and are now worth about €4.25, most of its directors have left, and it expects to post a loss of around €800 million ($1.26 billion) for its 2007/2008 fiscal year, which ends on March 31.

IKB, which specializes in loans to small and medium-sized enterprises, was one of the German banks hit hardest when the US market for high risk, or subprime, mortgages collapsed in August.

Supervisory board president Ulrich Hartmann told the assembly that the board had no way of heading off the catastrophe that almost pushed IKB into bankruptcy.

“The crisis broke without warning,” Ulrich Hartmann told the assembly in the western city of Düsseldorf.

“We had no chance of being able to foresee the risks and ward off the crisis,” Hartmann claimed, because the supervisory board had not been told until it was too late how exposed the bank was to the US subprime market.

“Why did you accept that,” one angry shareholder asked to applause from the crowd.

“You took my money,” another said.

The group has benefited from a series of rescue packages put together by the German government and private banks worth around €10 billion so far. German officials have now ordered an outside audit of IKB, in which state-owned development bank KfW has a dominant holding.

On Wednesday, European Central Bank president Jean-Claude Trichet reminded European Union lawmakers in Brussels that central bankers had issued several public warnings a year before the crisis broke that financial markets were underestimating risks.

“I remember myself saying that we have to be prepared – and the message was for the private sector in particular of course – for a market correction,” Trichet said.

“That was visible in the level of spreads, in the level of risk premia in the level of volatility that was observed in a large number of markets,” he pointed out.

Back in Duesseldorf, IKB sharehoders rejected a management request for a vote of confidence.

“They are completely incompetent,” said shareholder Dieter Eisele, including the government, the central bank and regulatory authorities among those who he said bore responsibility for the debacle.

Shareholders were also asked to approve a capital increase of €1.5 billion, to which KfW has already said it will sign on, increasing its stake from 43 percent at present to around 90 percent.

KfW wants to sell its holding at some point, but is likely to find it hard at the moment.

“Does IKB have a chance to survive,” a small shareholder wondered. “It should be shut down. It should be placed in bankruptcy, properly.”

ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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