• English Site
• >Business
• >Economic and Financial Crisis
• >

  Credit Crunch Fallout: Germans Fear Meltdown of Financial System

Credit Crunch Fallout Germans Fear Meltdown of Financial System

By SPIEGEL Staff

Part 2: Hitting Big Business Where It Hurts

The state-owned banks are not alone. The German economy is also suffering from the effects of the financial crisis. "Germany cannot uncouple itself from the world economy," says Walther Otremba, state secretary in the German Ministry of Economics.

Otremba has kept careful track of what bankers, business owners and the officials of major trade groups have been telling him. German exporting companies are showing the first signs of the coming slump. Orders once considered dependable are being cancelled, costs are on the rise and loans can only be had with markups, even for low-risk projects.

It's like the beginning stage of the flu, when the patient still appears healthy and strong. But the virus is already replicating in the body, and the patient is beginning to feel the effects of joint pain and crippling fatigue.

For years, the German economy benefited from the fact that German sports cars and high-end kitchens were seen as hip in the United States. But now the chain reaction set in motion by declining real estate prices, increasingly scarce credit and recession fears is depressing US demand for such products.

Even worse, because the US Federal Reserve, fearing a nationwide bank crash, is flooding the markets with cheap money, the dollar has plunged to a new record low, with bitter consequences for German producers. Since the beginning of the year, the products sold by their American competitors have become almost 7 percent cheaper, and profits from US sales are melting away as the dollar weakens even further.

The plunge of the US currency has already shaken the core of German industry: machine building, aviation and automobile manufacturing. Together these industries employ more than a million people and play a key role in preserving Germany's status as the world's largest exporter of goods. The weak dollar threatens thousands of jobs. Companies are forced to outsource some of their production to the dollar zone, and they are urging their suppliers to follow them on their trek westward.

BMW serves as an example of the consequences of the weak dollar. According to an analysis requested by CEO Norbert Reithofer, his company loses €80 million ($123 million) for each cent the dollar falls. This led to losses of more than €500 million ($770 million) last year. Now BMW plans to cut 8,100 jobs, most of them in Germany, while at the same time investing $750 million (€487 million) to expand its plant in Spartanburg, South Carolina, where it will add 500 new positions. Reithofer hopes that these steps will enable BMW to reduce its dependency on the dollar exchange rate.

The VW Group has also lost money in North America in recent years because of the weak dollar -- to the tune of about €3.5 billion ($5.4 billion). In an attempt to rectify the situation, Volkswagen CEO Martin Winterkorn plans to build a new assembly plant in the United States with annual production capacity of about 200,000 vehicles.

Aircraft manufacturer Airbus is suffering the most from the dollar's weakness. Aircraft sales worldwide are transacted in dollars, but Airbus incurs a large share of its costs in euros. To respond to the problem, the company plans to drastically reduce costs with its "Power 8" restructuring program. The plan will mean the loss of 10,000 jobs and the sale of seven factories.

But now another side effect of the financial crisis is jeopardizing Airbus's restructuring plan. Because of the weak credit markets, Airbus may not even be able to sell its plants. "Some of the potential buyers are having trouble raising the money for the acquisition," says Louis Gallois, CEO of Airbus parent company EADS. The banks are turning off the money supply. According to a survey by the Bundesbank, "standards for commercial loans are being tightened across the board for all types of companies and loan terms."

The financial managers of construction material giant Heidelberg Cement are already feeling the new ice age. Last year Heidelberg acquired British competitor Hanson, financing a portion of the takeover with two publicly traded bonds. Within four months, rising credit market interest rates led to an additional cost of €7.5 million ($4.9 million). "Market conditions are totally absurd," says one Heidelberg manager.

Hitting Them While They're Down

Even worse off are companies that fell into the hands of corporate raiders like Blackstone, Permira, Carlyle and Fortress during the takeover frenzies of recent years. From frozen fish stick maker Iglu to model train builder Märklin to the media group Kabel Deutschland, well over 600 German companies -- altogether employing about a million people -- are now controlled by the international private equity industry. Hungry for profits, the banks financed their corporate takeovers at exorbitant prices because, until recently, they could quickly sell the carelessly approved loans to greedy investors.

But no one is buying anymore. The market for billions in takeover loans is dead, as are many of the deals that had attracted corporate raiders. In the slump, the investment companies are trying to squeeze what they can out of their new acquisitions.

Last Wednesday, for example, Fortress demonstrated how to milk a German company. The US financial investor owns 80 percent of real estate management giant Gagfah, which was originally owned by the German retirement insurance system. Now that the company has selectively raised rents, laid off personnel and reappraised its inventory of 170,000 apartments, the owners want to see their money and have ordered Gagfah to significantly increase its profit distributions.

Permia and KKR, two other private equity firms, are taking a similarly brazen approach to plundering their television empire, the ProSiebenSat.1 media conglomerate. They are having the company pay out dividends that are three times as high as its 2007 profits. This has resulted in the company's debt growing by more than €3 billion ($4.6 billion), putting it in a position in which any crisis could jeopardize its existence.

And the crises will come, especially now that German economic growth is declining. "It cannot be ruled out that the weak phase in the United States will last the entire current year," says economic guru Bert Rürup, "which means that the climate for the German economy will likely become more difficult next year."

The Coming Paradigm Shift

If the economists are right, there will soon be a fundamental shift in the political agenda. The government and the opposition are still discussing how to distribute the fruits of Germany's economic recovery more broadly among social classes. But soon the focus could shift to keeping growth alive within domestic industry.

For some time German Economics Minister Michael Glos, a member of the conservative Christian Democratic Union (CDU), has had a plan on the back burner with which he hopes to stimulate the economy with additional tax reductions.

The government is also prepared for a continuation of the bank crisis. If other banks run into trouble, Finance Minister Peer Steinbrück plans to come to their aid with fiscal tools, even if it gets expensive for the government. "Preventing a bank crash," say officials at the finance ministry, "takes precedence over budget consolidation."

In the wake of the financial crisis, a new debate has begun over the role of the state. For years, the prevailing dogma was that the international capital markets ought to be left largely to free market forces. But now even financial investors and top bankers are calling for more government control.

This also revives a government initiative that was a dismal failure last year. In the face of US resistance, Berlin failed in its attempt to introduce tighter regulations for hedge funds. "But now," says an advisor to Chancellor Angela Merkel, "even the Americans see the issue in a new light."

Beat Balzli, Konstantin von Hammerstein, Dietmar Hawranek, Wolfgang Reuter, Michael Sauga

Translated from the German by Christopher Sultan