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ECONOMY

IKB faces shareholder wrath over subprime mess

Directors of distressed German business lender IKB faced furious shareholders on Thursday who voiced anger over the management of one of the country's biggest US subprime market victims.

More than 1,000 small shareholders attended a general assembly of the bank, a former safe investment now in the midst of a storm that has had to be rescued several times from bankruptcy since August.

IKB shares have lost around 70 percent of their value over the past six months, and are now worth about €4.25, most of its directors have left, and it expects to post a loss of around €800 million ($1.26 billion) for its 2007/2008 fiscal year, which ends on March 31.

IKB, which specializes in loans to small and medium-sized enterprises, was one of the German banks hit hardest when the US market for high risk, or subprime, mortgages collapsed in August.

Supervisory board president Ulrich Hartmann told the assembly that the board had no way of heading off the catastrophe that almost pushed IKB into bankruptcy.

“The crisis broke without warning,” Ulrich Hartmann told the assembly in the western city of Düsseldorf.

“We had no chance of being able to foresee the risks and ward off the crisis,” Hartmann claimed, because the supervisory board had not been told until it was too late how exposed the bank was to the US subprime market.

“Why did you accept that,” one angry shareholder asked to applause from the crowd.

“You took my money,” another said.

The group has benefited from a series of rescue packages put together by the German government and private banks worth around €10 billion so far. German officials have now ordered an outside audit of IKB, in which state-owned development bank KfW has a dominant holding.

On Wednesday, European Central Bank president Jean-Claude Trichet reminded European Union lawmakers in Brussels that central bankers had issued several public warnings a year before the crisis broke that financial markets were underestimating risks.

“I remember myself saying that we have to be prepared – and the message was for the private sector in particular of course – for a market correction,” Trichet said.

“That was visible in the level of spreads, in the level of risk premia in the level of volatility that was observed in a large number of markets,” he pointed out.

Back in Duesseldorf, IKB sharehoders rejected a management request for a vote of confidence.

“They are completely incompetent,” said shareholder Dieter Eisele, including the government, the central bank and regulatory authorities among those who he said bore responsibility for the debacle.

Shareholders were also asked to approve a capital increase of €1.5 billion, to which KfW has already said it will sign on, increasing its stake from 43 percent at present to around 90 percent.

KfW wants to sell its holding at some point, but is likely to find it hard at the moment.

“Does IKB have a chance to survive,” a small shareholder wondered. “It should be shut down. It should be placed in bankruptcy, properly.”

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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