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ECONOMY

Bundesbank sees increasing risks for German banks

Risks for German banks from the eurozone debt crisis are increasing, but recent efforts to strengthen capital resources meant those risks were still manageable, the Bundesbank said Thursday.

Bundesbank sees increasing risks for German banks
Photo: DPA

“The risks to the German financial system grew perceptibly as the sovereign debt crisis worsened and widened over the summer of 2011,” the central bank wrote in its annual Financial Stability Review.

As the environment deteriorated, “the German banking system, too, faces new burdens,” the Bundesbank said. German banks would probably have to make additional writedowns on Greek government bonds, for example.

Moreover, their earnings prospects were gradually being squeezed by recent market developments and the muted economic outlook. “However, the German banking system at least enters this period of major uncertainty with improved resilience,” the report said.

“Capital levels have risen appreciably in recent years, earnings have been very stable to date, and funding vulnerabilities have been reduced.”

Executive board member Andreas Dombret, presenting the report, said that “overall, the Bundesbank believes that risks arising from exposures to Greece, Ireland and Portugal are manageable.” By contrast, the volume of exposure to borrowers in the large euro-area countries Italy and Spain was greater.

Nevertheless, the overall assessment of the German financial system was positive, the Bundesbank said.

The quantity and quality of German banks’ capital had improved. Between the spring of 2008 and the summer of 2011, the core Tier-1 ratio of 13 major German banks had increased from 8.1 percent to 13.1 percent. And the banks’ earnings had remained stable for some time now.

“But the many positive developments in the German banking system should not blind us to the fact that the outlook has deteriorated,” said Bundesbank vice president Sabine Lautenschläger.

“New burdens as a result of the direct and indirect consequences of the sovereign debt crisis such as haircuts on euro-area bonds and plummeting prices for many assets are weighing on financial institutions’ earnings,” she said.

The Bundesbank therefore welcomed EU plans to recapitalise large banks in a bid to counter the loss of confidence in the European banking sector, Dombret said.

The Financial Stability Review insisted that for markets to function properly, market participants had to be made responsible.

“That also means that systemically important financial institutions must be able to exit the market without the financial system collapsing,” Dombret said.

AFP/mry

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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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