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EUROPEAN UNION

Recapitalisation ‘counterproductive’ says Deutsche Bank

Recapitalising Europe's banks will not solve the eurozone's current debt crisis, the only way is to restore confidence in the solidity of countries' public finances, Germany's top banker said on Thursday.

Recapitalisation 'counterproductive' says Deutsche Bank
Photo:DPA

“It’s not the capital resources of banks that are the problem, but the fact that sovereign debt has lost its status as a risk-free asset,” said Deutsche Bank chief Josef Ackermann.

“The key to solving the problem therefore lies with governments, or more precisely, in the restoration of confidence in the solidity of public finances,” Ackermann added.

“Indeed, the current recapitalisation debate is actually counterproductive, because on the one hand it sends the signal that a debt ‘haircut’ is more likely,” the head of Germany’s biggest bank argued.

“And on the other hand, because the cash needed for a recapitalisation will almost certainly not come from private investors but the countries themselves and that would, in turn, only increase a country’s debt situation.”

On Wednesday, European Commission president Jose Manuel Barroso called for banks to “urgently” increase their core tier-one capital ratios and warned that those refusing to comply could be forced to abandon bonuses and dividends.

Barroso said banks should first try to tap the private market to beef up their capital, with support from governments if necessary. If such support is unavailable, the eurozone’s rescue fund, the European Financial Stability Facility (EFSF), could provide loans.

Ackermann insisted that he was not questioning the idea that increasing a bank’s capital ratio would make it more resilient. But that “many banks have already boosted their capital ratios massively on their own,” he said.

“For me, it is debatable to see an increase in European banks’ capital ratios as a way out of the debt crisis because the injection of capital does not tackle the real root of the problem,” Ackermann argued.

Furthermore, the authorities must be careful not to over-regulate banks “because that will result in a less efficient financial sector and the deterioration in the supply of financing to companies and households,” he said.

From Deutsche Bank’s point of view, Ackermann saw “no reason to restrict credit to German companies” which were “financially solid.”

“We regard the German economy as robust, even if growth is slowing,” he said.

But the question was “whether banks will be able to continue to guarantee financing or whether they will be practically forced to restrict credit via a possible eurozone debt haircut and new regulatory frameworks,” he said.

AFP/jcw

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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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