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ECONOMY

Analysts expect German banks to cope with Lehman’s demise

German economists and banking experts said on Tuesday the world’s third largest economy would likely cope fairly well with the fallout from the demise of US investment bank Lehman Brothers.

Analysts expect German banks to cope with Lehman's demise
Photo: DPA

Analysts largely agreed with German Finance Minister Peer Steinbrück’s assessment that – barring a total meltdown of the global financial system – Germany would likely weather the latest storm currently humbling the elite of Wall Street.

“The failure of the fourth-largest US investment bank will naturally have some impact on the German banking sector, because the financial world is all so tightly tied together these days,” Olaf Kayser from the Landesbank Baden-Württemberg told The Local. “But German banks have really wound down their exposure of the past 12 months. There’s no large danger lurking out there.”

Still, Kayer admitted the coming months could be rocky ones for Germany’s financial capital Frankfurt am Main, which is disproportionately dependant on the banking sector. “There have been worse episodes, but if there are further failures such as AIG then the risk to German banks will of course increase,” he said.

Dr Manfred Jäger, a financial markets expert at the German Economics Institute in Cologne, said the structure of the German banking sector would partially shield it from the crisis, since the country’s major banks such as Deutsche Bank and Commerzbank combine investment banking with large retail banking operations.

“It’s pretty bad at the moment. The criteria for larger loans might be a bit tougher, but there’s no evidence of a real credit crunch right now,” he told The Local. “That, of course, can change if the entire economy worsens over the next three to four months.”

Jäger said the financial crisis would “continue to hurt for the rest of the year, but I believe German banks essentially are based on a solid foundation.”

Dr Christian Dreger from the Institute for Economic Research (DIW) in Berlin said although the bankruptcy of Lehman Brothers signalled the crisis was “far from over,” the Germany economy would continue to chug along in the coming months. “Germany is fairly well placed because the United States isn’t quite as important to German exports as it used to be and consumer demand here isn’t based on credit,” Dreger told The Local. “German households don’t like to take on debt.”

Some economists in Germany, however, are predicting the fallout could be far greater than a few bankers in Frankfurt getting the sack. Dr Gustav Horn, director of the Institute for Macroeconomics and Economic Research (IMK) at the Hans Böckler Foundation, promptly slashed his growth forecast for 2009 on Tuesday.

The IMK now is only expecting the German economy to grow 0.4 percent next year, as the turbulence on the global financial markets encouraged the economists at the at the trade union friendly Hans Böckler Foundation to shave half a percentage point off their GDP forecast for next year.

The crisis was also keeping the European Central Bank, which is headquartered in Frankfurt, busy for a second day in a row, as it pumped more liquidity into the money markets in the hopes of staving off a credit crunch. After offering €30 in emergency lending on Monday, the ECB added another €70 billion on Tuesday.

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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