VZCZCXRO0666
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHRL #1685/01 3540931
ZNR UUUUU ZZH
P 190931Z DEC 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 2881
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHDF/AMCONSUL DUSSELDORF PRIORITY 0169
RUEHFT/AMCONSUL FRANKFURT PRIORITY 7802
RUEHAG/AMCONSUL HAMBURG PRIORITY 0237
RUEHLZ/AMCONSUL LEIPZIG PRIORITY 0173
RUEHMZ/AMCONSUL MUNICH PRIORITY 1961
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 BERLIN 001685 
 
STATE FOR EEB(NELSON),EEB/OMA(SAKAUE, WHITTINGTON), 
DRL/ILCSR AND EUR/AGS 
LABOR FOR ILAB(BRUMFIELD) 
TREASURY FOR ICN(KOHLER),IMB(MURDEN,MONROE,CARNES) AND OASIA 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL GM
SUBJECT: THE GERMAN CREDIT CRISIS: HOW BAD IS IT? 
 
REF: A. BERLIN 1476 
     ¶B. BERLIN 1677 
 
BERLIN 00001685  001.2 OF 002 
 
 
¶1. SUMMARY.  German businesses and banks are debating whether 
or not there is a credit crisis in Germany.  There is no 
shortage of anecdotes about companies facing credit 
constraints.  The picture is in fact mixed: many large, 
industrial firms are having problems securing credit at 
reasonable prices, whereas small- and medium-sized 
enterprises (SMEs) are either self-financing or having less 
trouble.  As the recession deepens, however, even smaller 
German firms could have problems getting loans.  The German 
government and European Central Bank are intervening to help 
keep credit circulating in the economy.  END SUMMARY. 
 
DEBATE OVER CREDIT CRUNCH 
------------------------- 
 
¶2. Since the financial crisis reached Germany this fall, 
fears of a credit crunch have grown.  Anecdotes abound. A BMW 
representative complained to ConGen Munich representatives 
that his company recently had to borrow at an extraordinary 
600 basis points above the bank rate.  Citing high 
refinancing costs, Volkswagen's financial affiliates applied 
for loan guarantees from the government,s 500 billion euro 
bank rescue fund ("SoFFin") (REF A).  MAN's Chief Financial 
Officer told a German newspaper, "There is definitely a 
credit crunch," and blamed financing difficulties for 
declining truck sales.  The company has taken steps to help 
its customers finance the purchase of new trucks.  According 
to the Financial Times, the global container shipping 
industry, 36 percent of which is German-owned, is having 
trouble getting essential letters of credit, preventing many 
ships from even leaving port.  Nevertheless, Deutsche Bank 
CEO Josef Ackermann recently told Bavarian television, "There 
is no credit crisis in Germany."  He added that German banks 
had increased the amount of credit they grant by 13 percent 
over the past year.  Whom should we believe? 
 
LARGE FIRMS ARE SUFFERING 
------------------------- 
 
¶3.  The answer may depend in part on the borrower.  A survey 
by the Munich-based Ifo, one of Germany's premier economic 
institutes, found a disparity between large firms and small- 
and medium-sized enterprises (SMEs).  Four in ten large 
German companies saw tighter access to credit in November, 
more than double the number in August.  Far fewer SMEs 
reported problems.  Ulrich Klueh, head of the Scientific 
Staff at the German Council of Economic Experts, told ConGen 
Frankfurt Econoff that banks were hoarding funds to boost 
their capital in the face of significant write downs. 
 
¶4. A separate report by BDI -- a German lobby group 
representing large, industrial concerns -- is consistent with 
Ifo's findings, concluding its members are having more 
trouble obtaining credit.  One-third of respondents reported 
problems, and fully two-thirds complained of deteriorating 
credit terms, including increased loan guarantee premiums and 
tougher disclosure requirements.  Among those surveyed, the 
automotive, steel and metal processing, paper, engineering, 
construction, shipbuilding and ceramics industries had the 
most problems. 
 
¶5. Many lending institutions are operating under difficult 
circumstances.  A recent Bundesbank survey shows that half of 
responding German banks had tightened lending standards on 
their clients since 2007 by, for example, increasing loan 
margins, lowering credit ceilings, and reining in credit 
lines.  Many of those surveyed explained that tighter 
conditions in international money and bond markets were key 
factors ultimately influencing the terms they could offer 
clients.  The study found that since the financial crisis 
began, the cost of equity financing had more than doubled, 
spreads on commercial bonds had soared, and the market for 
commercial paper had dried up.  Respondents to the Bundesbank 
survey confirmed loan terms were more restrictive for certain 
sectors, such as the automobile industry.  Many also reported 
the slowing economy was having a secondary effect on lending, 
as companies faced liquidity problems thanks to lower 
 
BERLIN 00001685  002.2 OF 002 
 
 
revenues.  DIHK representatives told Embassy Berlin EMIN that 
banks were having trouble finding buyers for securitized 
debt. 
 
SMES ARE DOING BETTER 
--------------------- 
 
¶6. Small- and medium-sized enterprises (SMEs) -- which 
account for 90 percent of all German companies -- are having 
few funding problems.  Axel Nitschke, Executive Director of 
the German Chambers of Industry and Commerce (DIHK), told 
Embassy Berlin EMIN that many middle-sized firms are 
self-financing, so they need little if any outside funding. 
Smaller firms tend to borrow more often, but usually need 
relatively small amounts, which are readily available from 
the cash-flush savings banks ("Sparkassen").  The German 
savings bank association DSGV reports that savings banks 
actually increased the volume of loans they made to SMEs by 
10.5 percent in the first three quarters of 2008, compared 
with the same period last year.  A representative of the 
Hesse and Thueringen Savings Bank Association likewise noted 
lending by members in his region was up 40 percent on the 
year.  Unlike large commercial and state banks, savings banks 
generally have no direct exposure to exotic financial assets, 
and maintain a high level of tier 1 capital.  They are not 
going through a painful process of "deleveraging" like larger 
commercial and state banks. 
 
¶7. DSGV said it expects lower loan volume in the future as a 
result of the recession. SMEs, some of which are integral 
parts of larger firms' supply chains, will increasingly 
suffer from collapsing global demand.  Demand for loans from 
savings banks will likewise decrease. 
 
IN SEARCH OF NORMALCY 
--------------------- 
 
¶8. Economists note a healthy financial sector is a 
prerequisite for economic growth.  Keen to ensure German 
banks can lend, the German government created SoFFin, its 500 
billion euro bank rescue fund (REF A).  It has also launched 
a 12 billion euro fiscal stimulus plan to boost demand in the 
wider economy, and is considering a second wave of measures 
(REF B).  For its part, the European Central Bank (ECB) has 
attempted to keep funds circulating by lowering its main 
policy rate, as well as the rate it pays on sums parked with 
it overnight by banks.  It is considering creating a 
&clearing house8 to overcome distrust between banks in 
order to boost the interbank lending market. 
 
¶9. Some observers think more needs to be done.  For example, 
the government could loosen SoFFin's strict conditions to 
encourage more participation by Germany's troubled state 
banks.  The government could also move quickly on a second, 
larger stimulus to boost demand.  Many would like to see the 
ECB set its main policy rate far lower than it has been 
willing to do thus far.  Critics of the "clearing house" idea 
contend that high borrowing costs are attributable to the 
increased risk that lending banks themselves face rather than 
to distrust, and question the wisdom of the ECB's approach. 
Calls for more intervention will likely grow louder as 
economic conditions deteriorate, putting more pressure on the 
authorities to act. 
 
¶10. ConGens Frankfurt and Munich provided input for this 
cable. 
Koenig