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German Credit Crunch Deepens

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Germany's top industrial group has warned that credit conditions are going from bad to worse across much of the country's manufacturing base, dashing hopes for a swift recovery.

"The liquidity crunch is increasingly threatening the survival of companies, as well as finance for new orders," said Hans Heinrich Driftmann, president of the German Chamber of Commerce and Industry (DIHK). "This is becoming a danger to possible recovery."

Mr Driftmann said Germany's €2,500 (£2,100) bonus for trading in old cars had given an artificial boost for a few months but was now returning like a "boomerang" to haunt the auto-industry. "It was a flash in the pan, not a real rebound," he said.

A DIHK survey of German industry, to be released this week and obtained by Der Spiegel, found that over a third of all large companies are still seeing credit conditions tighten further, if they can borrow at all. Terms are now tougher than they were at the height of the global crisis over the winter.

"Financial conditions are getting worse for important sectors of the economy," said the report. It found that borrowing costs had risen for most firms even though the European Central Bank has cut its key interest rate to an historic low of 1pc.

The ECB has agreed in principle to embrace quantititative easing with a purchase €60bn of covered bonds but the amount is tiny compared to the aggressive monetary blitz in the US and Britain, and it will not even begin until July.

The bank has been heavily criticised by private economists for "fiddling while Rome burns" but it remains concerned about the long-term inflationary risk of emergency stimulus.

Neil Mackinnon, chief economist at ECU Group, said Washington believes European states are "free riding" on American stimulus, expecting the US to pull them out of crisis yet again.

Europe's industrial output continued to slide in April and was down 22pc from a year earlier, suggesting that talk of a "V-shaped" rebound is premature. At best, the pace of decline has slowed. Production fell 23pc in Germany and 24pc in Italy.

The ECB expects the eurozone economy to contract by 4.6pc this year and a further 0.3pc next year, with no recovery until mid-2010.

Structural rigidities of the region raise risks that it will remain trapped in slump well after the rest of the world has turned the corner, as it did after the dotcom bust.

This time Europe faces the extra head-winds of a strong euro, over-valued against the 45-odd countries such as China that are linked to the dollar. This currency effect is slowly "hollowing out" Europe's industrial core.

So the scrappage scheme appears to have failed.

And conditions are going from bad to worse, however in the UK we have green shoots and everything is OK.

Either the recovery rampers are lying or its the Germans lying.

Perhaps the Germans have failed to grasp that debt is wealth?

What strange times we live.

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I've said it before and I'll say it again - if people had to buy BMW's and Mercedes at full price, with their own money, cash up front, how many would we see on our roads?

Couldn't agree more. People turning up to events in BMW's and all I think is not that they have a nicer car than me it's so they got a car on credit; big deal! Now they're in a debt with a depreciating asset.

German DAX index tanking quite badly at the moment. Over 2% down, erasing all this month's gains.

[edit: the old stupid, annoying there, their, they're spelling error :angry: ]

Edited by pl1

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