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ECONOMY

Germany backs law to nationalise banks

The German government has approved measures allowing it to temporarily nationalise troubled banks through the seizure of shares in order to shore up the country’s financial sector.

Germany backs law to nationalise banks
Photo: DPA

“This measure is meant to stabilise a bank relevant to the system in Germany,” Finance Minister Peer Steinbrück told a press conference in Berlin on Wednesday, referring to the troubled property lender Hypo Real Estate (HRE).

He said the government had no interest in increasing its influence in the banking sector, but that Germany also wanted to avoid a situation similar to what happened when US investment bank Lehman Brothers last year.

“It’s about securing public funds,” he said, adding that nationalisation was only to be used as a last resort.

The law is seen paving the way for the government to bail out Munich-based Hypo Real Estate, which would be the first time in modern German history the state has taken control of a bank.

Nationalising banks “is only permissible when there are no other reasonable legal and economic solutions available to safeguard financial market stability,” according to the draft text obtained by news agency AFP. “The banking crisis has expanded into an acute crisis of the financial system. In this crisis situation, it is the fundamental duty of the state to restore trust in the financial markets and to prevent a further deterioration of the crisis.”

HRE has soaked up more than €100 billion ($126 billion) in public aid since October, half of it in public loan guarantees, but its future still depends on the state becoming a major shareholder.

The government fears an HRE bankruptcy could have a devastating knock-on effect in Germany, possibly even in Europe.

In addition to its real-estate activities, HRE plays a major role in the issuance of Pfandbriefe, bonds in which small investors, savings banks and insurance companies have placed large sums. However, the concept of seizing assets from troubled companies is hotly disputed in Germany for historical reasons.

The idea is linked to Nazi seizures of Jewish property in the 1930s and East German confiscation of private business after World War II. But as the crisis shows no sign of ending, the nationalisation of major banks – previously unthinkable – is becoming increasingly seen as a palatable option in the face of the ongoing financial sector chaos.

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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