German Budget Surplus Defies Both the Odds and a Global Credit Crunch

By Jason Simpkins
Staff Writer

Germany is on its way to a surplus for the first time in 18 years, the Financial Times reported – a bit of a surprise given that country’s exposure to the U.S. subprime mortgage mess.

In fact, two German lenders had to be rescued after investments linked to the U.S. subprime market collapsed.

Despite the financial hits taken by its banks, Germany still managed a budget surplus in the first half of the year, exceeding the expectations of the government, as well as the expectations of the most optimistic of economists. It managed a $1.6 billion surplus, only the second midyear surplus Germany has seen in the past 20 years. By this same point last year, the country was running $31 billion in the red, Germany’s statistics bureau said.

The increased revenue appears to be the result of a 29.8% increase in wages, as well as an 11.9% jump in corporate-tax revenue. Over the past few years, Germany has benefited from lower unemployment and rising corporate revenue and wages. Still, the rapidity at which Germany has improved upon its fiscal efficiency, which has been bleak as of late (Germany breached the European Union’s fiscal rules every year from 2002-2005), has been astonishing, experts say. 

Such good news couldn’t have come at a better time for the country.  Germany is one of the European countries that has been most affected by U.S. subprime mortgage defaults. In the past three weeks, German banks IKB Deutsche Industriebank AG and Sachsen LB had to be rescued because of their exposure to credit markets.

Sachsen fell into a liquidity crisis of its own when it attempted to roll over some commercial paper – typically a very routine financing process – but found that its usual cast of lenders had evaporated. The bank had a large exposure to U.S. asset backed securities through an Irish affiliate, Ormond Quay. IKB is a small commercial lender that found itself in a similar predicament, when it was no longer able to refinance its commercial paper program – meaning it could no longer function as a financial institution. As a result, Germany’s federal development bank, KfW, issued close $11 billion worth of relief.  

The problem in Germany seems to be an overabundance of banking institutions and an unwillingness to let banks that employ faulty practices sink. An overpopulated – and therefore lackluster – home market has forced small institutions like Sachsen LB to make up for the lagging profits with aggressive trading strategies and risky overseas-market forays for profit. Meanwhile, the German government’s refusal to turn its bank on poorly managed – or inadequately financed or shoddily run – institutions doesn’t allow for a culling of the herd. 

Right now, some German factions are proving to be more concerned than others. West LB CEO Alexander Stuhlmann told journalists at a recent banking event that: “We sense reluctance on the part of foreign partners to extend credit to German banks,” adding, “if we have a banking crisis in Germany with other countries cutting us off, then other banks will also face difficulties.”

A poll administered by the Zew Center for European Economic Research justified Stuhlmann’s concern. It found that investor confidence has fallen to an eight-month low.

Still, Germany’s finance minister Peer Steinbruek seems to think that such fears are unfounded, saying: “We have no reason to believe that the consequences of the crisis that has been caused by the U.S. mortgage sector will spill over to Germany and the European Union. As far as we can see, there is no spillover effect into the real economy.” 

Other German ministers and economic institutes, including the Berlin-based DIW, have likewise concluded that there are no indications that German production, hiring, or spending has been affected.

Regardless of their point of view, the latest news of a surplus bodes well for that country, especially because the German economy typically picks up momentum in the second half of the year. Christmas bonuses and seasonal sales usually mean more income and value-added tax (VAT) revenue in the second part of the year. Fiscal performance has improved in the back half of the year in Germany for the past three years. 

Should Germany, a country with a poor fiscal record, a contingent of bloated financial institutions overly reliant on risky foreign assets, and a government all too eager to rescue said institutions when they get into trouble, produce a surplus during this devastating credit crunch, then there’s hope for us all yet.

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