VZCZCXRO5419
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSL RUEHSR
DE RUEHRL #0946/01 2171513
ZNR UUUUU ZZH
P 051513Z AUG 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 4858
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHDF/AMCONSUL DUSSELDORF PRIORITY 0234
RUEHFT/AMCONSUL FRANKFURT PRIORITY 8206
RUEHAG/AMCONSUL HAMBURG PRIORITY 0320
RUEHLZ/AMCONSUL LEIPZIG PRIORITY 0231
RUEHMZ/AMCONSUL MUNICH PRIORITY 2160
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 BERLIN 000946 
 
SENSITIVE 
 
STATE FOR EEB (NELSON), EEB/OMA (SAKAUE, WHITTINGTON), 
DRL/ILCSR AND EUR/CE (HODGES, SCHROEDER) 
LABOR FOR ILAB (BRUMFIELD) 
TREASURY FOR ICN (KOHLER), IMB (MURDEN, MONROE, CARNES) AND 
OASIA 
TREASURY PASS TO FEDERAL RESERVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV PREL GM
SUBJECT: WILL A CREDIT CRUNCH IMPEDE GERMANY'S RECOVERY? 
 
REF: A. BERLIN 1685 
     ¶B. BERLIN 0593 
 
BERLIN 00000946  001.2 OF 003 
 
 
¶1.    (SBU) SUMMARY:  A heated debate is again raging over 
whether or not the German economy is experiencing a credit 
crunch.  Politicians and businesses complain how hard loans 
are to get, and claim that tighter credit threatens recovery 
in Europe's largest economy.  Others say overall credit 
volumes have held up, and point to weaknesses in the wider 
economy as the culprit of irregular lending activity.  The 
picture is in fact mixed: lending is more restrictive in some 
respects, but the situation has not yet become a crisis. 
This could soon change, however.  German banks are struggling 
under the weight of illiquid assets, and government rescue 
schemes are unlikely to repair the financial sector's 
fundamental weaknesses.  Furthermore, Basel II requirements 
and EU Commission state-aid rules are putting pressure on 
banks to build up their capital base and restrict lending. 
Germany's financial sector appears ill-prepared to contribute 
meaningfully to economic recovery.  END SUMMARY. 
 
CRYING WOLF? 
------------ 
¶2. (SBU) Much like December 2008 (REF A), key political 
figures are warning that tight credit conditions could 
jeopardize recovery from Germany's worst post-war recession. 
Lamenting a credit crunch, Chancellor Angela Merkel of the 
Christian Democratic Union (CDU) threatened to "have a 
serious word with the banks" if loans did not increase.  The 
Social Democratic Party (SPD) Chancellor-candidate 
Frank-Walter Steinmeier's freshly tapped economic advisor 
Harald Christ said banks' reluctance to lend to small- and 
medium-sized enterprises (SMEs) was endangering recovery. 
Finance Minister Peer Steinbrueck (SPD) told banks they had a 
"duty" to lend out funds they had acquired at historically 
low rates from the European Central Bank (ECB).  Much to the 
irritation of Bundesbank President Axel Weber, Steinbrueck 
even suggested the Bundesbank consider buying commercial 
paper to get credit flowing.  The Federation of German 
Industry (BDI) says its members -- many of which are large, 
industrial concerns -- are finding it increasingly difficult 
to obtain loans.  To assess the situation, Steinbrueck will 
convene a meeting with banks and businesses on September 1, 
2009 in Berlin. 
 
¶3. (SBU) Others are not so sure.  Gerhard Schorr, Director of 
the Association of Mutual Banks in Baden-Wurtemberg, 
described an "unrealistic expectation that everybody has to 
receive a loan during a recession, while banking supervisors 
simultaneously require banks to exercise prudence in granting 
credit."  According to Michael Schroeder of the Center for 
European Economic Research (ZEW), "Both the absolute level 
and the rate of growth of credit volume compared to the 
previous year contradict talk of a credit crunch in Germany." 
 What is really going on? 
 
LONELY IN THE MIDDLE 
-------------------- 
¶4. (SBU) European Central Bank (ECB) data indicate that the 
volume of German financial institutions' loans to Eurozone 
non-financial corporations has in fact fallen slightly, to 
931.6 billion euros in June, down from 937.1 billion euros in 
May.  Still, banking industry representatives told us the 
real concern was the type of credit that banks were currently 
issuing, not the overall volume.  Financing with a maturity 
"beyond five years" is relatively harder to get, according to 
Carsten Gross, Director of the Association of State Banks. 
Long-term lending (more than five years) increased by just 
2.2 percent in the first quarter of 2009 compared to the 
previous quarter, while medium-term lending (between one and 
five years) increased by 8.8 percent, and short-term lending 
(under a year) grew by 11.9 percent.  So-called "syndicated 
bonds," wherein several banks form a consortium to lend a 
relatively large sum (often to large companies), are far less 
available today, said Gross.  In contrast, credit to domestic 
enterprises and self-employed persons expanded by 5.4 percent 
 
BERLIN 00000946  002.2 OF 003 
 
 
on a year-on-year basis in the first quarter of 2009.  Bernd 
Brabaender, Managing Director of the Association of German 
Private Banks, agreed that large loans to big companies were 
down.  He added, however, that the smallest of the SMEs, 
which often lack collateral, are also starting to have 
problems.  Thomas Keidel, Director of the Association of 
Savings Banks, told us that depending on the region, savings 
and cooperative banks are now providing 50-80 percent of 
credit to companies.  Companies supplying the domestic 
market, he added, are actually finding it easier to get 
loans. 
 
¶5. (SBU) Recent studies substantiate these views.  The Ifo 
Institute found that larger companies in Germany are having 
difficulty obtaining loans for two reasons: 1) they are more 
affected by the recession due to their stronger export focus, 
which in turn makes banks more cautious about lending to 
them; and 2) large companies are more often clients of 
commercial banks and state banks, which are currently 
restrictive in their lending.  Large, manufacturing firms in 
the automotive, chemicals and machinery sectors are feeling 
the pinch the most. 
 
¶6. (SBU) According to another study by the German Chamber of 
Commerce (DIHK), tighter credit conditions and higher credit 
costs are indeed affecting some companies.  Almost two-thirds 
of those surveyed, however, said they had experienced no 
problems; some said credit conditions had actually eased. 
The current lending situation, while abnormal, is actually 
"not as bad" as it was during the economic 2002-2004, when 
GDP shrank by far less than this year's expected 6 percent 
contraction.  DIHK sees problems on the horizon, however.  So 
far, German SMEs, which are normally self-financing and 
therefore have less need to borrow, are starting to exhaust 
reserves because of the downturn.  Many now need loans just 
to stay afloat. 
 
BAD, BAD BANK 
------------- 
¶7. (SBU) While Germany's weak economy is a major factor 
affecting the credit-worthiness of borrowers, other factors 
are also influencing bank's willingness to lend.  A leaked 
report from the bank regulator Bafin estimates German banks 
still have as much as 800 billion euros in hard-to-value 
assets on the books, with a major share held by the ailing 
state-owned banks (though the Finance Ministry put the actual 
amount of truly "toxic" paper at only around 230 billion 
euros).  Banks are restricting certain types of lending as 
they build up provisions against expected future losses. 
According to Moody's, German banks are thinly capitalized, 
with little more than 2 percent of equity supporting assets. 
(NOTE: Under Basel II, banks developing their own bespoke 
risk measurement systems may maintain lower risk capital 
requirements.) 
 
¶8. (SBU) German lawmakers recently approved a "bad bank" plan 
to help rid banks of their toxic assets.  The plan is 
actually a revision of the Financial Market Stabilization 
Act, which created the 480 billion euro bank rescue fund 
("Soffin").  According to Svena Brinkmann of the Finance 
Ministry's National and International Financial Market and 
Monetary Policy Division, the new plan allows banks to create 
institute-specific, special-purpose vehicles (SPVs), where 
banks may voluntarily park assets for up to 20 years (REF B). 
 The plan also envisages a separate "consolidation model" for 
state banks, covering the transfer of risk positions and 
business divisions to liquidation institutions at the federal 
or state level. 
 
¶9. (SBU) The banks are not impressed.  Bernd Brabaender told 
us that while Germany's private banks officially welcome the 
plan, few will sign on.  The scheme has onerous conditions, 
such as the 10 percent "haircut" banks take when transferring 
assets to the SPV.  Banks must also cap executive salaries at 
500,000 euros.  Most of all, there is not a genuine transfer 
of risk.  As a result, only the sickliest of banks -- perhaps 
 
BERLIN 00000946  003.2 OF 003 
 
 
WestLB -- will sign on. (NOTE: Commerzbank and Postbank 
recently declared they would not participate.)   Others will 
merely lumber forward, zombie-like, weighted down by toxic 
assets. 
 
¶10. (SBU) Furthermore, the German government and Bundesbank 
have resisted calls to apply U.S.-style "stress tests." 
Instead, an EU-wide assessment is underway, with aggregate 
results due in the fall.  Results for individual banks will 
not be made public, so the exercise may raise more questions 
than it answers.  Jens Conert, Division Head for Banking, 
Ministry of Finance, told us the three participating German 
banks were "not representative of the German banking sector," 
though he could not reveal their names. 
 
OUTSIDE FORCES 
-------------- 
¶11. (SBU) Meanwhile, German banks must contend with 
restrictions from beyond Germany's borders.  Basel II 
requires banks to set aside additional capital when corporate 
clients are downgraded.  Franz-Christoph Zeitler, a member of 
the Bundesbank's Board of Directors, recently warned of a 
"dramatic downgrading of entire asset categories" in 
2009-2010.  Recognizing the tight spot German banks are in, 
Finance Minister Steinbrueck tried to convince his EU 
colleagues to ease Basel II rules at the recent EU Finance 
Ministers meeting.  He was unsuccessful. 
 
¶12. (SBU) A further complication is EU state-aid rules.  The 
EU must approve certain "stabilization measures without 
specific time limits, such as risk shields and capital 
injections," explained Jens Conert.  An example is the 
state-owned WestLB.  The EU Commission tied approval of a 5 
billion risk shield for WestLB to a requirement to halve 
total assets.  Another example is the Commerzbank-Dresdner 
Bank merger, backed by substantial state aid.  The combined 
bank is shrinking its balance-sheet from 1.1 trillion euros 
to just 625 billion euros -- less than the pre-merger 
Commerzbank alone.  As Bernd Brabaender explained, banks are 
caught between conflicting imperatives: the government wants 
them to lend, but the Commission wants them to consolidate 
their balance sheets. 
 
COMMENT 
------- 
¶13. (SBU) With big, long-term loans relatively hard to come 
by, credit conditions in Germany are far from normal.  The 
increased difficulty small companies are now having obtaining 
credit is another worrying sign, especially since many 
believed SMEs would weather the financial crisis better than 
most.  Current credit conditions are due, in part, to 
weakness in the overall economy, which diminishes the quality 
as well as quantity of credit demanded.  As for the supply of 
credit, Germany's financial sector is burdened with problem 
assets and counter-cyclical requirements that deter lending. 
 
¶14. (SBU) Still, it is probably a stretch to call the current 
situation a "credit crunch."  Rather, the real concern is not 
so much the present, but the future.  With no fix for the 
sector's problems on the horizon, banks have little incentive 
to increase lending.  The fact that long-term credit is 
relatively hard to get is a sign of future uncertainty. 
Absent serious efforts to restore the financial sector to 
health, strong economic growth will remain elusive.  In turn, 
slow growth (or no growth) will further weaken banks' balance 
sheets, with a negative feedback loop strangling hopes for 
recovery. 
 
¶15. (U) This cable was coordinated with ConGen Frankfurt. 
Bradtke