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ECONOMY

Commerzbank shares slammed by government bailout

German markets emerged from shell-shock Friday following news the state will take a 25 percent stake in the second biggest bank, Commerzbank, so it can manage a costly takeover of the troubled Dresdner Bank.

Commerzbank shares slammed by government bailout
Photo: DPA

Commerzbank shares posted heavy losses on the Frankfurt stock market, with many analysts saying existing shareholders would be left holding the bag after the total amount of a state bail-out climbed to €18.2 billion ($24.9 billion).

That is more than 5.5 times the bank’s current free-floating market capitalisation of €3.26 billion, but as Baader Bank stock strategist Robert Halver told AFP: “There is no other alternative. The state is playing the role of mid-wife for a painful birth.”

Berlin said Thursday it would inject €10 billion into Commerzbank on top of an €8.2-billion cash injection in December to strengthen the bank as it buys Dresdner Bank from insurance group Allianz for an estimated €5.1 billion. The government also wants Commerzbank to continue extending crucial credit to German companies.

Both Dresdner and Commerzbank have suffered heavy losses stemming from the international financial crisis, but the state’s latest massive injection raised questions about what problems might lie ahead for the combined bank, which aims to be a counterweight to the biggest German bank, Deutsche Bank.

“There appear to be several billion euros of charges in the fourth quarter” for Commerzbank and Dresdner Bank combined, Sal Oppenheim stock analyst Carsten Werle told AFP.

But Commerzbank appeared determined to wrap up its takeover of Dresdner Bank this month and needed the extra cash to ensure the deal goes smoothly. Most of the government’s investment was in the form of a “silent participation” that does not give it voting rights, though it was also buying 295 million new shares that would take its holding to 25 percent plus one share, effectively a blocking minority.

A Finance Ministry spokesman told AFP Friday that “it was expected to send two representatives to Commerzbank’s supervisory board” to “assume our responsibility in how taxpayer’s money is used.” But “the state does not intend to intervene in the bank’s operational decisions,” he stressed.

History thus repeated itself in part for the bank, which was nationalised by the German government in 1932 for five years, noted LBBW stock strategist Antje Laschewski.

“This memory creates a very negative feeling on the markets,” she said.

In addition, as the state becomes Commerzbank’s biggest shareholder, it will dilute current shareholders’ earning per share by 20 percent, Werle pointed out.

Holders of Commerzbank stock will also see it forced to reimburse “an annual pre-tax charge of €1.5 billion for the silent participations,” the analyst noted, because the European Commission set the interest rate on Berlin’s cash injection in December at 9.0 percent. In 2007, the bank’s best year ever, it posted a net profit of €1.9 billion.

After the news was announced on Thursday, Commerzbank shares hit an all-time low €4.47 before rebounding to close with a loss of 13 percent. On Friday, they showed a further loss of 7.43 percent to €4.86 in mid-day trading, while the DAX index of leading shares was essentially flat overall.

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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