By Ambrose Evans-Pritchard, Telegraph.Co.Uk | 23 September 2009
Economics Last Updated: September 23rd, 2009
If there are any German readers of this blog, I would like to know what they think of the latest breath-taking provocations of German finance minister Peer Steinbrück.
Ill-informed belligerence: Peer Steinbrück
[[All he needs is a little more hair and a small mustache.: normxxx]]
Remember that Herr Steinbrück is not a journalist, pundit, or back-bench maverick. He speaks officially for the German government and for the German nation on the international stage. Every assertion that he made about Britain in his interview with Stern is either factually wrong, or such a serious distortion of events that it amounts to a smear. Furthermore, it was quite threatening.
What he said, in effect, is that Germany will 'marshal its forces' to ensure that a chunk of the British economy is shut down— whatever the social consequences. This is the closest thing I have seen to a declaration of economic warfare in Western Europe in my lifetime. "There is clearly a lobby in London that wants to defend its competitive advantage tooth and nail."
Stern said that he sees "dark powers at work" in Britain. He accused the UK government of "doing its best" to sabotage stricter financial regulation at the G20 in Pittsburgh. This resistance will be crushed. "We WILL effectively change the rules on the financial markets. Politics is sometimes like a locomotive which comes slowly up to full speed."
"The British financial industry gains 15 per cent of the gross domestic product, in Germany it is six per cent." Britain is out of step with the rest of Europe in trying to keep this "advantage going". It must "share the burden" of the financial crisis in the form of a tax on exchanges.
"The central question is who pays the bill? It cannot be that the citizens of Europe should carry the whole cost." Britain was having "an especially hard time, to put it politely", agreeing to tougher regulation of hedge funds.
Now, I understand that this Westphalian bully is fighting an election on Sunday, and may well be forced out of government. But let me state a few points.
1. Britain is not blocking the G20 deal on bonus caps for bankers. It broadly supports the idea. It backs the push for greater transparency.
2. Hedge funds had almost nothing to do with crisis as agreed by the Turner Report and the EU's Larosiere Report. They are already well regulated by the FSA in London (unlike New York, where they are not regulated). The FSA's hedge fund code is generally viewed as a model for others.
3. UK financial services are 7.8% of GDP, not 15%.
4. German Landesbanken and mortgage lenders got into trouble on their global ventures because they tried to extract extra profit and were badly regulated by BaFin, the Bundesbank, and Mr Steinbrück himself. Their use of Irish SIVs, etc, to conduct off-balance-sheet speculation is the direct result of bad rules (Basel, etc.) drawn up after earlier crises— a perfect example of how knee-jerk regulation by ignorant populists backfires.
5. Mr Steinbrück is the arch-cover-up artist himself. He has been resisting— "tooth and nail"— a transparent stress test of the German banks. This comes despite a string of criticisms from the IMF, OECD, and European Commission. It is blindingly obvious that he has swept the problems under the rug until after the election.
6. Britain is in considerable trouble right now— entirely of our own making, and caused by a decade of inept government, fiscal incontinence, and excess debt. Is that a moment to kick us in the teeth? One reason why the budget deficit has exploded to 13% of GDP is that the collapse of City profits has cut a huge hole in government revenues. There is already a brutal adjustment underway. What is the benefit of further contracting credit in the middle of severe downturn. The man is mad.
7. In terms of morality, I don't see much to choose between Germany's car industry (with its stress on high-powered engines that consume scarce resources, and pollute) and the 'City' of London. They are both core national industries, pillars of our respective economies.
8. Angela Merkel shares the British view that "binding powers" for the EU's new trio of super-regulators is a step too far, and a breach of Germany's constitution.
If a British Chancellor gave an interview on behalf of the British nation saying the German car industry should be shrunk massively, it would be viewed as a gross and gratuitous attack on Germany.
Need I add, yet again, that the banks did not cause this global crisis. Governments around the world caused the crisis by forcing down the price of credit (Greenspan, Bank of Japan, and ECB on short rates: China et al on long rates, by flooding the global bond market) far too low for many years, encouraging debt. Banks were the instruments, not the cause. That is an elementary point that many people— including Mr Steinbrück, obviously— still fail to understand.
The Westphalian bully likes taunting Britain. He made waves earlier this year mocking the "crass Keynesianism" of Gordon Brown at the most dangerous moment of the crisis. This prompted a formal protest by the British ambassdor in Berlin.
Mr Steinbrück subsequently engaged in a great deal of crass Keynesianism himself, as well as outright protectionism through the Deutschland Fund. [[A clear violation of EU rules!: normxxx]] If he remains in office, he will soon have to deal with the second leg of the German banking crisis that he has so artfully dodged until now. We must resist Schadenfreude when that moment comes.
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German State To Lend Directly As 'Second Credit Crunch' Looms
By Ambrose Evans-Pritchard | 26 August 2009
Germany could directly intervene in the credit insurance and lending markets as soon as September, 2009 to head off a looming credit crunch, as it fears the economic recovery may soon falter as banks refuse to roll over loans. Tough action for tough times: the German government will be 'proactive' in heading off another credit crisis.
The finance minister, Peer Steinbrück, said broad sectors of the German economy are in trouble even if the country has avoided a full-blown lending crisis so far. "Conditions have become much tougher for some industries— electrical engineering, machine tools, suppliers, chemicals and shipbuilding. We have clear evidence from both small and large companies that lending is jammed. "The banks are not stepping up to their responsibility to provide credit," he told the German paper Handelsblatt.
"Some indicators have performed better, but… it is too early to say we have shaken off this crisis. There is still lots of risk and uncertainty, and no grounds for complacency. The fact that GDP proved better in the second quarter with 0.3% growth is somewhat reassuring, but let's not forget the economy has shrunk 7% from a year before."
Mr Steinbrück has now backed away from talk of forcing banks to lend, recognising they have to rebuild their capital, and shifted the focus to direct lending by the state. Among likely measures are use of the state-bank KFW to make "global loans" to industry on terms that pass on the full benefit of lower interest rates, as well state aid for credit insurance and trade finance. He said the bank rescue fund SoFFin still had €60bn left for support.
While some measures have been discussed before, there appears to be a new urgency. Decisions may be made by "early September". The comments are hard to reconcile with the a record surge in the IFO business confidence index, which jumped for a fifth month to 90.5 in August. Market sentiment is racing ahead of hard economic data.
Axel Weber, the Bundesbank chief and until recently the arch-hawk, last week spoke of a 'second wave' of the credit crisis as home-grown problems come to light, triggered by ratings downgrades that force banks to put aside more capital. "The first round of disruption in the bank balance sheets from structured credit products is behind us. Now we are threatened by stress from our domestic credit industry," he said.
"They are in panic," said Hans Redeker, currency chief at BNP Paribas. "They know the money supply and credit figures coming out are going to be awful". He added that Germany's stimulus measures have put off deep problems until after the election in September. The 'car scrappage scheme' has brought forward demand, implying a cliff-edge drop when the scheme expires. Kurzarbeit (short work) schemes that subsidise companies to keep idle workers on their books are slowly bleeding corporate balance sheets. "This has delayed the restructuring that needs to occur," he said.
Mr Steinbrück said markets are awash with liquidity again, but little is going into the real economy. "The banks evidently prefer to put their money into securities rather then granting new loans because they can get a higher return. After two years of financial crisis the gambler mentality is gaining the upper hand again."
The German authorities are deeply frustrated that so few banks have resorted to the 'rescue' scheme to rebuild their capital base. Critics say the Bundestag imposed such stringent conditions that lenders have opted instead to rein in lending. Mr Steinbrück said 'state lenders' pose a "systemic risk" to German finance. Few of the regional banks have a "viable" business model.
[[Sounds like a new new call for nationalizing (or, semi-nationalizing?) the banks! : normxxx]]
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