Cablegate: The German Credit Crisis: How Bad Is It?

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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

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