SHARE
COPY LINK

ECONOMY

Analysts expect German banks to cope with Lehman’s demise

German economists and banking experts said on Tuesday the world’s third largest economy would likely cope fairly well with the fallout from the demise of US investment bank Lehman Brothers.

Analysts expect German banks to cope with Lehman's demise
Photo: DPA

Analysts largely agreed with German Finance Minister Peer Steinbrück’s assessment that – barring a total meltdown of the global financial system – Germany would likely weather the latest storm currently humbling the elite of Wall Street.

“The failure of the fourth-largest US investment bank will naturally have some impact on the German banking sector, because the financial world is all so tightly tied together these days,” Olaf Kayser from the Landesbank Baden-Württemberg told The Local. “But German banks have really wound down their exposure of the past 12 months. There’s no large danger lurking out there.”

Still, Kayer admitted the coming months could be rocky ones for Germany’s financial capital Frankfurt am Main, which is disproportionately dependant on the banking sector. “There have been worse episodes, but if there are further failures such as AIG then the risk to German banks will of course increase,” he said.

Dr Manfred Jäger, a financial markets expert at the German Economics Institute in Cologne, said the structure of the German banking sector would partially shield it from the crisis, since the country’s major banks such as Deutsche Bank and Commerzbank combine investment banking with large retail banking operations.

“It’s pretty bad at the moment. The criteria for larger loans might be a bit tougher, but there’s no evidence of a real credit crunch right now,” he told The Local. “That, of course, can change if the entire economy worsens over the next three to four months.”

Jäger said the financial crisis would “continue to hurt for the rest of the year, but I believe German banks essentially are based on a solid foundation.”

Dr Christian Dreger from the Institute for Economic Research (DIW) in Berlin said although the bankruptcy of Lehman Brothers signalled the crisis was “far from over,” the Germany economy would continue to chug along in the coming months. “Germany is fairly well placed because the United States isn’t quite as important to German exports as it used to be and consumer demand here isn’t based on credit,” Dreger told The Local. “German households don’t like to take on debt.”

Some economists in Germany, however, are predicting the fallout could be far greater than a few bankers in Frankfurt getting the sack. Dr Gustav Horn, director of the Institute for Macroeconomics and Economic Research (IMK) at the Hans Böckler Foundation, promptly slashed his growth forecast for 2009 on Tuesday.

The IMK now is only expecting the German economy to grow 0.4 percent next year, as the turbulence on the global financial markets encouraged the economists at the at the trade union friendly Hans Böckler Foundation to shave half a percentage point off their GDP forecast for next year.

The crisis was also keeping the European Central Bank, which is headquartered in Frankfurt, busy for a second day in a row, as it pumped more liquidity into the money markets in the hopes of staving off a credit crunch. After offering €30 in emergency lending on Monday, the ECB added another €70 billion on Tuesday.

For members

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.” 

SHOW COMMENTS