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  The Credit Crunch: Banking Crisis Leaves Europeans with Bill in the Billions

The Credit Crunch Banking Crisis Leaves Europeans with Bill in the Billions

By Stefan Schultz

Part 2: How Solid Is Germany's Commerzbank?

In Germany, at least two other banks rely heavily on interbank money markets to refinance themselves like Hypo Real Estate: Essen Hypo and Euro Hypo. Both lenders are particularly vulnerable to credit crunches in the money markets, and both are subsidiaries of German banking giant Commerzbank. If they start to crumble, it would mark the first time a German private bank has been massively affected by the crisis.

Commerzbank has significantly greater capital on hand than Hypo Real Estate because the bank itself is less reliant on the money markets for financing. According to its own figures, in Germany alone Commerzbank has private customer deposits of €38.2 billion, as well as customer deposits at subsidiary Dresdner Bank valuing €20 billion. On the money market, Commerzbank finances itself primarily using long-term bonds. "We have already covered our refinancing needs for 2008," a Commerzbank spokesperson told the wire service Reuters.

Still, the company's €9.8-billion acquisition of Dresdner Bank from Allianz has caused its share price to collapse, making it vulnerable in the current financial crisis. The crash of Benelux banking giant Fortis, weighed down by its partial purchase last year of competitor ABN Amro for €24 billion, showed that the credit crunch can create serious problems even for full-service banks.

Economics Expert: ECB Should Lower Interest Rate

Peter Bofinger, a member of the German Council on Economic Experts, which advises the government on economic policy, said he believed the financial crisis is creating a burden for European markets. In order to counter the impact of the global credit crunch, he is calling for three concrete measures (see toolbox).

He also urged the European Central Bank to act. "The ECB must ensure that banks are able to borrow money at significantly lower interest rates," Bofinger told SPIEGEL ONLINE. The problem with the ECB's current policy is that it lends money through auctions, meaning that money is lent at interest rates far greater than the euro zone's key interest rate.

"The key interest rate is 4.25 percent, but the banks are actually having to pay the ECB 4.78 percent interest for one-week loans," Bofinger said. "If banks want to create liquidity on the market for three months, the current interest rate is over 5 percent -- that's the highest interest rate we've seen since the introduction of the euro."

In light of the difficult situation in the money markets, Bofinger said the ECB should offer one-week loans at a fixed interest rate in line with the current key interest rate in order to ease the situation for banks. He also said the ECB should move to lower the key interest rate to 3.75 percent.

On Thursday in Frankfurt, the ECB's board will hold its regular meeting, at which it will determine further monetary policy for the euro zone, the countries that share the European common currency. Despite the current tensions in the market, economy experts do not anticipate the ECB will lower the interest rate.

In order to limit the effects of the credit crunch in Europe, Bofinger also advised governments to create aid packages similar to the US bailout. "In my opinion, it is would also be better in Europe if the state acquired bad loans than to allow further banks to collapse, which could cost taxpayers a whole lot more," Bofinger said.

But banking expert Burghof called for reserve. "European banks should first try to meet their needs through the US package," he said. Still, he added, many won't be able to secure that aid, and if the crisis continues to escalate, he argued, a European bailout package would be inevitable. "And then," Burghof said, "Europe would be exposed to the maximum damage."

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