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EUROPEAN UNION

Germany moves to shore up panicky financial markets

The German government raced on Monday to reassure investors and individual savers that it will protect the Europe's biggest economy from falling victim to the global financial crisis.

Germany moves to shore up panicky financial markets
Photo: DPA

The stock exchange may not have got the message however as shares tumbled seven percent Monday in line with heavy losses elsewhere in Europe and Asia as Wall Street plunged too.

Berlin hoped a new €50-billion ($68-billion) rescue plan for the distressed mortgage lender Hypo Real Estate (HRE) and a blanket guarantee on private bank accounts would prevent panic from seizing a nation of savers.

Finance minister Peer Steinbrück said he did not rule out raising state guarantees on HRE credit lines and that there was “a plan B in the drawer” to ensure the banking sector did not collapse.

Steinbrück did not provide details but told a press conference: “We are aware that we will not get very far with case-by-case solutions.” The bank is now to be provided with credit lines worth a total €50 billion, of which a little more than half was to be guaranteed by the state.

HRE shares were hammered in afternoon trading on the Frankfurt stock exchange however, losing 35.15 percent to €4.87.

Meanwhile, the government said it would guarantee private bank accounts, estimated to be worth €1.6 trillion.

Economics professor Hans-Peter Burghof of the University of Hohenheim told German radio that amount represented “the biggest guarantee in history. “Never has anyone anywhere in the world guaranteed such a sum in two simple sentences,” he said, while noting that in principle the idea of giving guarantees was to ensure they would not be needed.

Chancellor Angela Merkel told reporters on Sunday that the government “will not allow an institution’s crisis to become a crisis for the entire system.”

Global Insight senior economist Timo Klein told AFP: “Since they were unable to correct themselves, financial markets looked to the German government (for help). The DAX is now looking for a general plan for the banks, maybe as early as

Wednesday.”

The European Commission said on Monday that Germany’s guarantee of all its bank savings seemed in line with EU competition rules and did not pose the same problems as a similar announcement by Ireland.

“The commission notes that the measures seem to be limited to retail bank deposits, so (it is) less liable to give rise to distortion of competition,” said Jonathan Todd, spokesman for EU Competition Commissioner Neelie Kroes.

“In general, retail deposit guarantee schemes can be an appropriate policy response to fears regarding the stability of the financial system,” he added.

In contrast, the Irish guarantees cover all deposits and there is also an issue if they apply to non-Irish banks present in the Irish market, said Todd. “The precise details of the (Irish) measures are still being discussed by Irish authorities,” he said.

The German government offered an unlimited guarantee for all private bank deposits Sunday in a bid to prevent a panic run on banks in Europe’s biggest economy.

German Chancellor Angela Merkel pledged: “We tell all savings account holders that your deposits are safe. The federal government assures it.”

Merkel had sharply criticised Ireland’s go-it-alone plan after crisis talks in Paris Saturday with the leaders of France, Britain and Italy.

“We have already asked the European Commission and the European Central Bank to try to talk to Ireland,” she said. “It is important to act in a balanced way and for countries not to cause harm to each other.”

Commission officials rejected charges that the EU executive’s overseeing role was being disregarded as individual member states scramble to shore up their own troubled institutions.

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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