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FINANCE

BayernLB first in line for German state aid

German regional bank BayernLB on Tuesday evening became the first bank to apply for state aid under a rescue package thrown together to underpin the country's financial sector.

BayernLB first in line for German state aid
Photo: DPA

Bayerische Landesbank said it would apply for €5.4 billion ($7.08 billion) in aid, taking advantage of a government-backed rescue plan worth €480 billion in direct aid and loan guarantees.

The southern regional bank, which is jointly owned by the state of Bavaria and regional savings banks, had invested heavily in asset-backed securities (ABS) which lost much of their value when the US market for high-risk, or subprime mortgages collapsed more than a year ago.

As it struggled to get back on its feet, BayernLB’s situation was slammed again when interbank loans dried up in the aftermath of a bankruptcy by the US investment bank Lehman Brothers in mid September.

On Monday, the cabinet finalised on Monday the conditions under which banks can make use of a €480-billion rescue package rushed through parliament last week.

By applying for the state aid, BayernLB will agree for example that its executives may earn no more than €500,000. Any dividend payments must go to the state and the government can also force the bank to reduce or give up entirely particularly risky lending practices, as well as to continue making loans to small and medium sized firms.

The programme passed by lawmakers on Friday includes €400 billion in loan guarantees in order to get banks lending to each other and up to €80 billion to shore up banks’ balance sheets battered by the financial crisis.

The rescue package, the biggest in postwar Germany, was similar to other measures announced by Germany’s partners in the 15-country eurozone along the lines of a British programme after crisis talks in Paris on October 12.

BayernLB, the second biggest German regional bank, posted a pre-tax loss of €770 million in the first quarter of 2008 that forced shareholders to come up with €4.8 billion in loan guarantees.

Landesbanken are a result of Germany’s federal political structure. They are publicly owned by local savings banks associations and regional authorities. As such they used to benefit from state guarantees that allowed them to extend credit at lower rates.

But “their business model does not work any more,” Merck Finck analyst Konrad Becker said. “The era when each state had its own bank is over.”

When the European Commission curbed the privilege in 2005, the banks were forced to look elsewhere for business and fell back on risky investments as a way to keep making money.

One possible solution for BayernLB is to merge with a powerful sister bank, Landesbank Baden-Wuerttemberg or LBBW, which would create a southern German banking powerhouse.

LBBW, the biggest regional bank, said last week that its level of shareholder funds was “very good” and that it did not need a cash injection from Berlin.

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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