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FINANCE

Iceland creates banking pain in told-you-so Germany

German politicians were fast to blame "Anglo-Saxon" excesses for the financial crisis but the country's own banks, particularly state-owned lenders, have been anything but risk-averse.

Iceland creates banking pain in told-you-so Germany
Photo: DPA

Figures this week from the Bank of International Settlements showed that German banks were by far the most enthusiastic when it came to lending money to Iceland, the Nordic island state teetering on the brink of financial collapse.

Iceland owed banks in Europe’s biggest economy over $21 billion (€16.5 billion), almost a third of the island’s total liabilities and far more than any other country, data from the central banking body showed.

“This was a very surprisingly high number … Iceland only has around 300,000 inhabitants, the same as a town like Wuppertal,” said Konrad Becker, banking analyst at the private Merck Finck bank. “And no one is going to lend Wuppertal $21 billion.

“German banks, even state-owned ones, were not examples of a prudent, conservative way of banking,” Becker told AFP.

The North Atlantic island has been hit hard by the financial crisis, with its government forced to nationalise its three largest banks and seek emergency bailouts from other countries and from the International Monetary Fund.

Germany’s loans to Iceland were five times higher than those of banks in Britain, with regional German bank BayernLB’s liabilities alone exceeding those of all Italy’s main banks combined, according to the Handelsblatt daily.

The figures are from June, but it is unlikely that banks would have been able to reduce significantly their exposure before the financial crisis snowballed in mid-September, analysts said.

And it is not just Iceland. The data also showed that German banks have also been at the forefront of investing in other European countries offering high returns – and high risks – most notably in Ireland and Spain.

Ireland last month became the first eurozone member to be in recession after years of breakneck growth, while the collapse of Spain’s once-booming property market has left many investors with their fingers badly burnt.

German banks have not yet given much detail but if the regional lender BayernLB is any guide – it has written off as worthless €800 million in loans to Iceland – this is going to add considerably to the pain already being felt in other areas.

BayernLB, one of Germany’s Landesbanks, this week became the first lender to seek help from the government’s €480-billion financial rescue package. Hamburg-based HSH Nordbank has since followed suit, and West LB is expected to take up the offer next week.

It is these state-owned lenders that are expected to be at the front of the queue for further bailouts, not private banks like Deutsche Bank or Commerzbank.

Meanwhile, the German finance minister turned up the heat on banks unwilling to take up the government offer. Peer Steinbrück criticized as “irresponsible” their reluctance to take the aid and see the banks fail instead.

“I would consider it irresponsible if a bank board were not to accept the protection offer and deliberately put up with a collapse of their institutions instead,” he told Bild am Sonntag newspaper.

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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