Merkel pledges German bank rescue package

Chancellor Angela Merkel said Sunday that Germany would press ahead with a raft a measures to support the country's banking sector in order to send "an important signal" to the markets.

“Tomorrow (Monday) Germany will get to grips with its package of measures,” Merkel said in Paris after an emergency summit on the global financial crisis of eurozone leaders hosted by French President Nicolas Sarkozy.

“We will do this together with France. Other countries too will also rapidly take measures so that … an important signal can be given to the markets,” Merkel said.

She gave no details of the package – the finance ministry said this would happen on Monday at the earliest – but press reports said it includes providing as much as €100 billion ($135 billion) in capital to shore up banks’ battered balance sheets.

In return the German state would take stakes in the banks, similar to a part-nationalisation announced by Britain last week, while Berlin would also provide as much as €400 billion in state guarantees to jumpstart stalled lending between banks, the reports said.

Taxpayers “have the right to expect that if they are contributing to the stability of the financial system that this will be honoured,” Merkel said in Paris.

The drying up of lending caused by the credit crunch, a problem which has worsened dramatically since the collapse of US investment bank Lehman Brothers last month, threatens to starve banks of cash and make them less willing to lend money to businesses and consumers in Europe’s biggest economy.

She said after Sunday’s meeting in Paris that the “tool box” of measures agreed in Paris by the leaders of the 15 countries sharing the euro currency plus Britain can “go some way to overcoming the financial crisis.”

“We are taking these measures … to keep the economy going, to guarantee people’s savings and to stabilise the financial system. This is our duty, even if it entails difficult decisions.”

Sources in Berlin said that Merkel’s cabinet would discuss the German package on Monday with a view to it going through parliament and becoming law by the end of the week – an aim that is far from certain in view of MPs’ misgivings. The details “will definitely not be announced today (Sunday), tomorrow at the earliest,” a finance ministry spokesman told AFP.

The head of parliament’s budgetary committee, Otto Fricke, said the guarantees would total around €300 billion and the capital injection around €100 billion.

“I know roughly the direction that it is going in,” Fricke told the Kölner Stadt-Anzeiger daily in an article to appear on Monday.

A week ago Berlin put together a 50-billion-euro rescue of Hypo Real Estate, the country’s fourth biggest bank, but this took the form of guaranteeing badly needed credit lines rather than the state taking a stake in the stricken commercial property lender.

Now though a drying up of the amount of liquidity held by German banks – as markets have tumbled in the past week and short-term lending has become even harder to secure – has forced a re-think in Berlin.

According to the Welt am Sonntag newspaper the capital injection alone would total more than €50 billion, while Handelsblatt reported that as much as €100 billion would be made available to stricken banks. It also became clear that the worst hit are not private German banks like Deutsche Bank but the Landebanks, the regional lending powerhouses that are owned by Germany’s 16 states, the reports said.

By shoring up Germany’s banks, Merkel’s government is attempting not only to calm stock markets – Frankfurt’s DAX lost more than a fifth of its value last week – but also to stop panic bank withdrawals by consumers and to prevent the crisis spreading to other sectors of the economy.

“We are not doing it in the interest of the banks but in the interests of people,” Merkel told the Bild am Sonntag in comments published Sunday. “Only action by the state is capable of restoring the necessary trust.”


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.


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.