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http://www.nytimes.com/2009/07/14/business...l/14inside.html

Germany Must Act to Avoid Its Own 'Lost Decade'

By PAUL TAYLOR

Published: July 13, 2009

PARIS — Is Germany the new Japan?

Germany, the biggest European economy, is well on its way to making a key mistake blamed for Japan’s “lost decade†of economic stagnation in the 1990s — failing to clean up its banks decisively.

The obstacles are political rather than financial. Berlin seems determined to avoid telling voters the bad news before a Sept. 27 general election about banks’ expected losses and the likely cost to the taxpayer.

Instead, the government is allowing banks to conceal or defer the full extent of their losses on toxic securities and bad loans and refusing to subject them to public stress tests or to require them to increase their capital. In doing so it risks perpetuating “zombie banks†that are too sick to lend to businesses and households.

“There are very strong political reasons for the policy paralysis,†said Nicolas Véron of Bruegel, an economic research group in Brussels. “Nothing can happen before the German election. But Japan waited a decade. We can wait three months.â€

It is no surprise that when the European Central Bank flooded euro-zone banks with €442 billion, or $616 billion, in liquidity last month, most preferred to deposit the money back with the E.C.B. in overnight deposits or put it in safe government bonds, rather than lend to the real economy.

Despite jawboning from the E.C.B.’s president, Jean-Claude Trichet, and threats by the German finance minister, Peer Steinbrück, the banks are effectively on a lending strike because their problem is not liquidity but solvency.

Eager to avoid a credit crunch before the election, Mr. Steinbrück failed to persuade his European Union peers last week to suspend bank capital adequacy rules, pending changes due this year. He was also rebuffed by the Bundesbank, Germany’s central bank, when he appeared to endorse the idea of its lending directly to businesses to bypass a frozen capital market.

Banks are expecting more loans to go sour and heavier losses on impaired assets as the recession bites deeper, eating into their capital bases. Their instinct is to draw in their horns and reduce leverage, since excessive leverage is what got them into the mess in the first place.

The E.C.B.’s latest Financial Stability Review explains why. It estimates that euro-zone banks face a further $283 billion in write-downs by the end of 2010 on top of the $366 billion in losses written off since the crisis began in mid-2007. Rather than requiring banks to recognize those bad assets and remove them from their balance sheets, most euro-zone governments have been playing for time, seemingly hoping that something will turn up.

Close links between Germany’s banks and its political establishment are another reason for reluctance to carry out painful restructuring. The regional Landesbanks and savings banks are key levers of political patronage. In an earlier role as state premier of North Rhine-Westphalia, Mr. Steinbrück was a negotiator with the European Commission on behalf of WestLB and other state-controlled Landesbanks. Of the private-sector banks, Commerzbank is on government life support.

Germany’s bad-bank plan for commercial and state banks is designed to stretch the problem out over the next two decades rather than resolve it. Banks may voluntarily put toxic assets into special purpose vehicles guaranteed by the state until maturity, paying an annual fee. But if the assets are worth less at the end than the price assessed by an independent valuer, the liability rests with the banks, not the taxpayer.

Italy, France, the Netherlands, Belgium and, to a lesser extent, Spain are all in denial about the extent of their banking problems, although the Dutch, Belgians and French have had to spend billions of euros of taxpayers’ money to save Fortis, ABN Amro, ING and Dexia.

Spain has been bolder, creating a €99 billion bank rescue fund, which is expected to lead to a wave of restructuring, alliances and bailouts after the country’s housing bubble burst.

So what does the euro zone have to do to avoid a Japanese-style prolonged period of stagnation with zombie banks?

Governments should start by telling voters and markets the truth about their banks’ exposures. Far from undermining confidence in all banks, as Mr. Steinbrück contends, disclosure would restore trust in sound institutions and dispel general suspicion.

They should then compel banks that are found wanting to increase their equity capital, either from private investors if they can, or from the state if they must. This may lead to a temporary nationalization of some sick banks, as Britain did with Royal Bank of Scotland. Ultimately, banks that are not viable must be broken up or closed down.

The European Commission’s competition department and the Committee of European Banking Supervisors can provide pan-European political cover for governments that fear taxpayers’ wrath over bailing out banks with public money.

The way should be clear once Germany has voted. It would be dangerous to delay any longer. As the Japanese example shows, procrastination merely increases the long-term pain.

Europe is sooooo over. No wonder we've been behaving like a mini-US for all these years. No wait, the US is over too. Now what?

Watch the Euro tank on Germany's demise.

:o

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Very good article, thanks for that.

Been saying this for a while: US/UK have been quicker to address problems than the Eurozone, plenty of bad news still to come out of the EZ.

Whether or not QE is the right answer to the current crisis, only time will tell - but sweeping problems under the carpet and pretending everything is fine is definitely NOT going to work.

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http://www.nytimes.com/2009/07/14/business...l/14inside.html

Germany Must Act to Avoid Its Own 'Lost Decade'

By PAUL TAYLOR

Published: July 13, 2009

Europe is sooooo over. No wonder we've been behaving like a mini-US for all these years. No wait, the US is over too. Now what?

Watch the Euro tank on Germany's demise.

:o

Germany will come clean after their election in September 2009. I think this is when we'll see the true extent of their £££ wreckage.

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CIA World Factbook Economy section's makes the UK look quite good in 2008!

UK figures est 2008

Public Debt 47.2% of GDP

Unemployment 5.5%

https://www.cia.gov/library/publications/th...ok/geos/UK.html

Germany figures est 2008

Public Debt 62.6% of GDP

Unemployment 7.9%

https://www.cia.gov/library/publications/th...ok/geos/GM.html

France figures est 2008

Public Debt 67% of GDP

Unemployment 7.4%

https://www.cia.gov/library/publications/th...ok/geos/FR.html

I wonder where we stand now.

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I wonder if QE is better than doing nothing. If the Germans let their bad banks go bust in September, they'll be 300 billion ahead of the UK.

As for the CIA figures: UK unemployment figures are fiddled. And the public debt figures don't include public sector pension liabilities (which are enormous) etc.

Anyone got figures that aren't fiddled? (Sorry if that sounds like we're living in a collapsing soviet economy).

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Well OT , but the title reminded me of a sun sports headline when England had played Sweden

at football under Graham Taylor , played badly , and lost 2 nil ....

Swedes 2 Turnips 0

made me laugh anyway .

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I wonder if QE is better than doing nothing. If the Germans let their bad banks go bust in September, they'll be 300 billion ahead of the UK.

Reality check. They cannot let their banks "go bust", that would cause global systemic collapse.

More likely, they are going to have to rescue a few banks AND kick off QE in earnest - instead of trying to sweep problems under a carpet.

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Oddly enough, countries that don't devalue, pull fast ones with QE etc tend to do better over the long run.

Germany was excoriated in the late 70s for not allowing inflation to rip. That policy paid dividends in the 80s.

One should also look at total indebtedness - public / private / corporate; rather than just one figure.

It would be as well to remember the enormous contribution of - now rapidly diminishing - North Sea oil to the UK's exchequer.

Britain still has grave problems ahead of it; it would be wrong to point finger at, crow and laugh at the ostensible misfortunes of our major trading partners.

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Reality check. They cannot let their banks "go bust", that would cause global systemic collapse.

More likely, they are going to have to rescue a few banks AND kick off QE in earnest - instead of trying to sweep problems under a carpet.

I disagree with your reality check. The sums are so enormous, many banks will have to go bust: the governments don't have enough money to save them; all they can do is destroy their own currencies trying and/or buy some time.

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I disagree with your reality check. The sums are so enormous, many banks will have to go bust: the governments don't have enough money to save them; all they can do is destroy their own currencies trying and/or buy some time.

If all governments have to rescue their banks via QE, the relative strength of their ccy vs the others will change only slightly.

Are you saying the whole fiat currecncy system is going to collapse? I don't think so - although the gold bugs on here keep banging on about it ;)

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As for the CIA figures: UK unemployment figures are fiddled.

Presumably, the CIA's figures for developed economies are based on the standard ILO surveys...

Field Listing: Unemployment rate:

https://www.cia.gov/library/publications/th...2129.html"]https://www.cia.gov/library/publications/th...ields/2129.html

Germany

7.9% (2008 est.)

9% (2007 est.)

note: this is the International Labor Organization's estimated rate for international comparisons; Germany's Federal Employment Office estimated a seasonally adjusted rate of 10.8%

Edited by CrashConnoisseur

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I wonder if QE is better than doing nothing. If the Germans let their bad banks go bust in September, they'll be 300 billion ahead of the UK.

As for the CIA figures: UK unemployment figures are fiddled. And the public debt figures don't include public sector pension liabilities (which are enormous) etc.

Anyone got figures that aren't fiddled? (Sorry if that sounds like we're living in a collapsing soviet economy).

if the Germans let thier bad banks go bust in sept they will be well ahead of the uk in terms of corporate insolvencies. If Siemens, BmW, mercedes benz at all lose thier credit lines who do you think will step upto the plate to lend to them. the french banks, uk banks, us, banks. correct you have worked it out nobody can because the banks do not have the money. the only organisation that has the money (whether real or imaginary) to support thier national economy is the national govt of that country.

The article is saying put enough cash in the banks to support economic growth or be like Japan and have lost decade.

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