Germany moves to shore up panicky financial markets

The German government raced on Monday to reassure investors and individual savers that it will protect the Europe's biggest economy from falling victim to the global financial crisis.

Germany moves to shore up panicky financial markets
Photo: DPA

The stock exchange may not have got the message however as shares tumbled seven percent Monday in line with heavy losses elsewhere in Europe and Asia as Wall Street plunged too.

Berlin hoped a new €50-billion ($68-billion) rescue plan for the distressed mortgage lender Hypo Real Estate (HRE) and a blanket guarantee on private bank accounts would prevent panic from seizing a nation of savers.

Finance minister Peer Steinbrück said he did not rule out raising state guarantees on HRE credit lines and that there was “a plan B in the drawer” to ensure the banking sector did not collapse.

Steinbrück did not provide details but told a press conference: “We are aware that we will not get very far with case-by-case solutions.” The bank is now to be provided with credit lines worth a total €50 billion, of which a little more than half was to be guaranteed by the state.

HRE shares were hammered in afternoon trading on the Frankfurt stock exchange however, losing 35.15 percent to €4.87.

Meanwhile, the government said it would guarantee private bank accounts, estimated to be worth €1.6 trillion.

Economics professor Hans-Peter Burghof of the University of Hohenheim told German radio that amount represented “the biggest guarantee in history. “Never has anyone anywhere in the world guaranteed such a sum in two simple sentences,” he said, while noting that in principle the idea of giving guarantees was to ensure they would not be needed.

Chancellor Angela Merkel told reporters on Sunday that the government “will not allow an institution’s crisis to become a crisis for the entire system.”

Global Insight senior economist Timo Klein told AFP: “Since they were unable to correct themselves, financial markets looked to the German government (for help). The DAX is now looking for a general plan for the banks, maybe as early as


The European Commission said on Monday that Germany’s guarantee of all its bank savings seemed in line with EU competition rules and did not pose the same problems as a similar announcement by Ireland.

“The commission notes that the measures seem to be limited to retail bank deposits, so (it is) less liable to give rise to distortion of competition,” said Jonathan Todd, spokesman for EU Competition Commissioner Neelie Kroes.

“In general, retail deposit guarantee schemes can be an appropriate policy response to fears regarding the stability of the financial system,” he added.

In contrast, the Irish guarantees cover all deposits and there is also an issue if they apply to non-Irish banks present in the Irish market, said Todd. “The precise details of the (Irish) measures are still being discussed by Irish authorities,” he said.

The German government offered an unlimited guarantee for all private bank deposits Sunday in a bid to prevent a panic run on banks in Europe’s biggest economy.

German Chancellor Angela Merkel pledged: “We tell all savings account holders that your deposits are safe. The federal government assures it.”

Merkel had sharply criticised Ireland’s go-it-alone plan after crisis talks in Paris Saturday with the leaders of France, Britain and Italy.

“We have already asked the European Commission and the European Central Bank to try to talk to Ireland,” she said. “It is important to act in a balanced way and for countries not to cause harm to each other.”

Commission officials rejected charges that the EU executive’s overseeing role was being disregarded as individual member states scramble to shore up their own troubled institutions.

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Swedish finance minister: voters may have to accept falling real wages

Sweden's finance minister had told The Local that this year's election will largely be about rising costs, but that his party is not planning to intervene to prop up real incomes and so worsen inflation.

Swedish finance minister: voters may have to accept falling real wages

Speaking at a seminar on Sweden’s economic situation hosted by Swedbank, Mikael Damberg agreed that the coming campaign would be a so-called plånboksval, or “pocketbook election”, where rising costs and falling spending power are the dominant issue, but he said he thought this would benefit rather than harm the Social Democrats. 

“Economic issues will be very important,” he told The Local, “and I think people will think about who will be best in charge of the public finances, and who has been in government and handled tough situations, and I think that Magdalena Andersson, as the Prime Minister with seven years as Minister of Finance, is the right woman to lead Sweden in these difficult times.”

His worry, he said, was that Sweden’s political parties would respond to inflation levels of close to eight percent by promising voters subsidies and cash transfers to make up for rising prices, which if implemented would then risk fuelling an inflationary spiral. 

“It might be |a problem] if the parties draw the wrong conclusion, and think that they can spend a lot of money right now. Because if they spend too much money, too broadly, not focusing on vulnerable groups, then inflation will go up, and interest rates will go even higher. And that would actually worsen the situation in the wallet for ordinary people.” 

Instead, Damberg said that people living in Sweden would ideally simply tighten their belts and tolerate a period of falling real incomes. 

“For 25 years in Sweden, we have had real wage increases for ordinary workers, and that’s kind of unique on an international perspective. So this year, there will be a drop in real wages because of inflation,” he said.

He said that he hoped that in next year’s negotiations between unions and employers over new collective bargaining agreements, unions were as responsible as they have been historically, and avoided calling for inflationary pay hikes. 

“It’s tough. The war has made us all less rich, and some groups will be affected very much. But I think, there’s no point in getting wage increases if it pushes inflation higher. The trick here is to get wage increase that are for real, and not just on paper.” 

In the seminar, he said that there was a danger that the huge emergency spending packages Sweden, like other countries, had put in place to soften the impact of the Covid-19 pandemic would set a precedent, leading voters and politicians to think it was possible for governments to spend their way out of the coming economic difficulties in a similar way. 

His intention, he said, if he was reappointed finance minister after the election, would be to keep the tax rate roughly level with where it is now, neither raising nor lowering taxes, in the hope that Sweden’s state finances go into a small surplus next year. 

He said it had been right this year to pass measures to increase the incomes of the poorest families and the poorest pensioners, and that his party would still seek to give aid targeted those least able to cope with rising prices. 

“Politics has a role,” he said. “But you need to be careful not to create too big a role, because if you think that politics can do everything, then we will start fuelling inflation. It’s a lot harder now than it was in the pandemic.” 

Shortly before the seminar, Ulf Kristersson, leader of the opposition Moderate Party, made a speech in which he accused the government of bringing in 46 new taxes over the last four years, and together in a “left-wing cartel” with other parties of planning a series of tax hikes, including a property tax, a tax on savings, a wealth tax, a tax on the highest incomes, and a reduced tax break on cleaners and other households services.

“I think they’re a bit desperate, because they’re not doing that well in the polls,” Damberg said. “So one way [of improving the situation] is to try to frighten voters. But I think our record speaks for itself, and I think Magdalena Andersson has got a lot of credibility when it comes to handling Swedish economy.” 

“She has not introduced a property tax, and she has not in the last period in government increased the tax burden on ordinary people. If you look at the tax burden in Sweden over the last period, it’s gone down, not up.”