Germany faces a slowdown in corporate investment due to the US subprime mortgage crisis as banks focus on avoiding exposure to risky borrowers and weaker US demand eats into profits at German exporters.
Investment has been a crucial engine of growth in Europe's largest economy over the past two years, but greater aversion to risk at home and the spill-over from subprime losses abroad appears likely to rein in expansion. "The main effect of the current crisis is that financing conditions will deteriorate," said Gustav Adolf Horn, head of the IMK economic research institute, a think tank that helps compile a joint growth forecast for the German government.
Tighter credit means less investment, and leading think tanks have already begun lowering growth forecasts for Germany.
Horn said that not only would company profits suffer from slackening US demand - thus reducing company cash pools - but banks would also become more cautious about lending. "We're exporting close to ten percent of our goods to the United States, so it's bound to have an impact," he added. "Furthermore, we believe the euro is going to appreciate further, and that's also going to have a negative effect."
"But domestic companies looking for financing for investment are going to have a harder time too. In view of this, we think investment in plant and machinery here will be hit." The euro hit a lifetime high against the dollar above $1.39 last week as investors bet the US Federal Reserve would lower interest rates this week.
German banks have been the hardest hit in Europe by the losses linked to the US housing market. Two lenders were bailed out after nearly going under, prompting a flurry of calls for improved risk management in the banking sector.
FUNDING SQUEEZE:
If banks are less prepared to take risks, smaller and medium sized firms in Germany, known as the Mittelstand, will have to pay more to secure funding, said Niels Oelgart, an economist at the country's chamber of industry and commerce (DIHK). "This in turn will make investment harder," he said.
Commentators wonder whether Germany's banks can step in and fill the breach if companies' own sources of cash dry up. Germany's BVR co-operative banks association, which accounts for around one fifth of all non-bank loans issued in the country, is ready to step up, said spokesman Andreas Bley. "The co-operative banks have barely been affected by the banking crisis," he said. "We're more than ready to cope with a growing demand for loans. It may be that things are different for the odd bank in other sectors, but we've got no problem." Germany's BdB private banks' group said it did not want to comment on the sector's lending outlook until next week.
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