Saturday, August 23, 2003

Germany Looking Towards Japan?

Interesting article about Germany's Bankgesellschaft from Gillian Tett in the FT. The situation is described by some as being "the biggest banking scandal in German history". The Bankgesellschaft in its modern form was created by the Berlin government in 1994 from the fusion of a variety of state owned savings banks, mortgage lenders and commercial banks. Much of the Berlin reconstruction party was financed via the bank and now that the property momentum has all but dropped out of the German economy the bank has, well guess what, a substantial non-performing loan problem. Hence the comparisons with the Japanese situation. In 2001 German regulators belatedly inspected the bank, deemed it insolvent and forced it to declare a E1.65 billion loss, a record in the sector. Berlin's politicians decided they could not bear to see the bank collapse so they pumped in E2 billion more capital, taking state ownership from 57 per cent to 81 per cent, and promised to underwrite future losses on some E20 billion of particularly dubious loans in the bank portfolio. But with the new financial and economic climate in Germany things cannot be left to stand as they are, so the Berlin government is busily trying to sell the thing off. Just how representative of the German banking and finance sector the Bankgesellschaft actually is only time will show.

For Germans to avert their eyes from Japan is not a good idea. Germany's economy, the largest in Europe, has been ailing for so long that a question is starting to be whispered by international policymakers and businessmen: is it at risk of catching the so-called "Japanese disease", the deadly cocktail of deflation, stagnation, political paralysis and banking jitters that has bedevilled Tokyo policymakers for the past decade?

There are already similarities. In the immediate postwar decades, both nations rebuilt their shattered economies with startling speed and astonishing success. This was in large part because both had formidable manufacturing skills and had developed a financial system based around banks willing to channel cheap loans to industry. Indeed, by the 1980s (Japan) and 1990s (Germany), they were dominating the Asian and European economies respectively and were presented as the model for neighbours to emulate.

Then it went wrong. For the past 13 years, Japan has suffered from economic stagnation, spiralling national debt, falling prices, declining industrial competitiveness - and a series of banking collapses. In Germany, economic crisis became evident more recently after it mishandled reunification by converting the former East German currency into D-Marks at a level that made East Germany utterly uncompetitive. At the same time West Germany was saddled with a huge reconstruction bill. The country now faces the challenges of rising debt and an ageing workforce; its industries are losing competitiveness on the world stage and its economy is being stalked by deflation. Germany is even starting to display a feature that is both a symptom and cause of other economic ills - rotten banks.

German leaders angrily dismiss the idea that their nation is turning into a "second Japan". When Hans Eichel, the German finance minister, attended a conference of international bankers in Berlin this summer, he said the latest economic indicators "give rise to a certain optimism that the German economy can make a gradual recovery". Josef Ackermann, the chief executive of Deutsche Bank, a man whom Eichel praised for his "sensible optimism", says Germany's problems "are not comparable to a Japanese crisis".

Others disagree. "The situation is more alarming than the German government is admitting," said Stephen Roach, chief economist at Morgan Stanley. Indeed, it is precisely because men such as Eichel and Ackermann sound so upbeat that many economists are alarmed. For what has made Japan's predicament so pernicious in the past decade is not simply lousy economic data but the endless refusal by the Tokyo establishment to admit that anything is seriously wrong.

Optimists say this self-delusion won't happen in Germany and point out that in recent months Eichel and Chancellor Gerhard Schroder have been talking about the need for change, and are pursuing reforms in parliament. Critics say the pace is much too slow, partly because the Germans, like the Japanese, seem to prefer stability at almost any cost. Both still have living memories of the devastating consequences of chronic instability and war.
Source: Financial Times

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