taking the hype out of the hypo

Today’s Economist has a couple of interesting articles on Germany, bailouts, real estate, HRE and cash-for-clunkers car bonus. The most interesting bits in my opinion are:

The plans are hobbled by two constraints. The first is that the government hopes to avoid transferring much of the risk of losses to taxpayers without first punishing shareholders. That conflicts with the government’s equally pressing desire to avoid nationalising any more banks. These contradictory aims preclude the government from, for instance, wiping out the value of equity in banks by forcing them to write down their assets.

and

…fretting about debt and inflation is equally characteristic of the German soul. Many commentators have criticised the scrapping bonus. Singling out one industry for subsidy, even if it accounts for 20% of industrial production, is economically dubious. The bonus may rob sales from other deserving industries, from white goods to beer—as well as from future car sales. In France, which offered a scrapping bonus in the mid-1990s, sales slumped by 20% in the year after its expiration.

…but you can read the full articles herebelow.

Clunk-clicked

Apr 16th 2009 | BERLIN
From The Economist print edition

Germany’s cash-for-clunkers scheme shows some readiness to spend

ARE Germany’s leaders stubborn penny-pinchers, oblivious to the financial crisis and the urgent need for more fiscal stimulus? This was the charge when Chancellor Angela Merkel teamed up with France’s Nicolas Sarkozy to resist pressure to do more at the G20 summit in London. Or are they reckless spendthrifts, wasting billions on schemes that boost their popularity but do little for the economy? Such was the complaint on April 8th, when the grand coalition between Ms Merkel’s Christian Democratic Union (CDU) and the Social Democratic Party (SPD) more than tripled the amount available for its cash-for-clunkers scheme, which gives Germans a €2,500 ($3,330) handout to scrap their old cars and buy new ones.

The government had set aside €1.5 billion for this, as part of a stimulus package worth €50 billion in February. But the offer “zeroed in on the German soul”, as one newspaper put it. By early April, 1.2m had applied to take it up, twice as many as expected. Ms Merkel, facing an election in September, is in no mood to disappoint them. Nor is her SPD challenger, Frank-Walter Steinmeier, the foreign minister. So they threw an extra €3.5 billion into the pot, which now has enough in it to please 2m car-buyers.

This has lit the economic gloom with a rare flash of euphoria. In March car sales had jumped by 40% from March 2008, to the highest level since the boom after unification, putting Germany far ahead of other countries (see chart). The frenzy is mainly for small cars, the sort that drivers of decade-old clunkers most like to buy.

But fretting about debt and inflation is equally characteristic of the German soul. Many commentators have criticised the scrapping bonus. Singling out one industry for subsidy, even if it accounts for 20% of industrial production, is economically dubious. The bonus may rob sales from other deserving industries, from white goods to beer—as well as from future car sales. In France, which offered a scrapping bonus in the mid-1990s, sales slumped by 20% in the year after its expiration.

The small-car bias means foreign carmakers benefit more than German ones. In March domestic producers captured just 36% of the bonus bounty, even though their normal market share is over 60%. Germany wins brownie points for upholding Europe’s single market. But the scheme will do little for the likes of Daimler, which is contemplating layoffs, or Karmann, a supplier that has just filed for bankruptcy. Car production, which depends heavily on exports, has dropped to its lowest in 15 years. Writing in Handelsblatt newspaper, Ferdinand Dudenhöffer, an industry analyst, calls the cash-for-clunkers results “anything but exhilarating”.

But ex-clunker drivers’ elation is boosting the business climate overall, argues Ulrich Kater, an economist at DekaBank in Frankfurt. Production should pick up once carmakers clear their stocks of unsold cars. In Berlin sales of French-built Peugeots have tripled. Yet Christian Spreigl, head of local distribution, is not worried about a post-bonus slump. He says 85% of recipients are buying a new car for the first time, trading in one bought second-hand.

That is stimulus enough for now, says the government. The tax cuts and extra spending in its two stimulus packages add up to 1.4% of GDP this year, reckons Bruegel, a think-tank in Brussels, well above the total European average of 0.9%. America’s stimulus is worth 2% of GDP, but that does not account for “automatic stabilisers” like unemployment insurance, which are more generous in Germany.

Nonetheless, the buzz over a further stimulus will not go away. A subsidy for workers who have had their hours reduced could be extended from 18 to 24 months. There is talk of state-supported “transfer companies” where employers could temporarily park unneeded workers. Corporate tax might be cut. Plenty of politicians in Berlin insist there will be no new stimulus. But by doling out more cash for clunkers the government seems more afraid of voters than of debt.

Germany’s bail-out – Too little, and late

Apr 16th 2009 | BERLIN From The Economist print edition

Germany reluctantly faces up to the scale of its banking disaster IT PUZZLES many in Germany that the country’s punctilious parsimony and restrained housing market have not saved it from a banking crisis that seems every bit as bad as those suffered by spendthrifts abroad. Having refused for months to consider a “bad bank” to buy troubled assets, Germany is belatedly wrestling with a plan to do just that. And it is also being forced into its first nationalisation of a bank since the 1930s. The most visible of Germany’s ailing banks is Hypo Real Estate (HRE), which the state has already propped up with more than €100 billion ($132 billion) of loans and guarantees. Some of HRE’s woes stem from its commercial-property loans, many of which are now souring. But the big danger is the state of its DEPFA subsidiary, a large lender to governments and local governments. Although this is a relatively safe business, it is also not terribly profitable because governments can generally borrow very cheaply themselves. DEPFA’s big error was to try to boost margins by raising a large chunk of the money it loaned out in shorter-term money markets. That business model fell apart when credit markets froze; only huge dollops of government money have kept the bank afloat. With credit still tight, the only way to make a profit on DEPFA’s outstanding loans (even if they are all repaid) would be by refinancing them using the government’s cheaper debt. Given its problems, nationalisation of HRE seems the only sensible option. On April 9th the government’s bail-out fund offered to buy all of it from shareholders. Click here to find out more! The boldness the government has shown in dealing with HRE is, however, not at all evident when it comes to the broader problem of bad assets in the banking system. At a meeting on April 21st the government hopes to approve a plan proposed by the finance ministry to establish several small “bad banks”. These would use as much as €200 billion provided by the government to buy illiquid assets from their parent banks, freeing up capital so that the banks can lend more easily. The plans are hobbled by two constraints. The first is that the government hopes to avoid transferring much of the risk of losses to taxpayers without first punishing shareholders. That conflicts with the government’s equally pressing desire to avoid nationalising any more banks. These contradictory aims preclude the government from, for instance, wiping out the value of equity in banks by forcing them to write down their assets. They also preclude the government from assuming most of the risk on banks’ balance-sheets by insuring toxic assets, as has happened recently in Britain. The government’s hope is that by providing relief on illiquid assets it can allow banks to deal with toxic assets at a more leisurely pace. The worry, of course, is that the focus on illiquid assets instead of toxic ones may do little to restore confidence in banks or allow them to start lending again. “The mood has definitely turned in favour of a bad bank,” says Dorothea Schäfer of DIW, an economic-research institute in Berlin. “But it is unclear that the model now suggested will do anything to improve the situation of banks at all.” Having faced up to the problems within its banks, Germany is still not willing to take the decisions needed to solve them.

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1 Response to “taking the hype out of the hypo”


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