REGIONAL BAVARIAN VIEWS ON A GERMAN CREDIT CRUNCH

UNCLAS SECTION 01 OF 02 MUNICH 000197 STATE FOR EEB (NELSON),EEB/OMA (SAKAUE, WHITTINGTON), DRL/ILCSR AND EUR/AGS LABOR FOR ILAB (BRUMFIELD) TREASURY FOR ICN (KOHLER),IMB (MURDEN, MONROE, CARNES) AND OASIA TREASURY PASS TO FEDERAL RESERVE SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN PGOV PREL GM SUBJECT: REGIONAL BAVARIAN VIEWS ON A GERMAN CREDIT CRUNCH Sensitive but Unclassified. Protect Accordingly. SUMMARY -------------- ¶1. (SBU) With a persistent focus among media and business leaders on the question of whether Germany is caught in a credit crunch, ConGen Munich surveyed local finance and business leaders to understand what is happening in Bavaria, one of Europe's largest economies. There is a liquidity supply problem among Bavarian Small and Medium-sized Enterprises (SMEs),however, not all SME companies seem to be affected the same. Particularly larger SMEs and individual business branches like the automotive supply industry feel a credit crunch as banks shy away from the risk of credit defaults in depressed industry sectors. Likewise, for larger companies, banks seem to lack sufficient liquidity, both to meet business needs and to maintain proper balance sheet ratios. The Bavarian Finance Ministry counts on better communication between SMEs and their house banks to avoid a serious credit crunch. Large private firms like BMW are helping out their troubled suppliers directly. End summary. A Credit Crunch in Some Sectors, Real or Imagined -------------- ¶2. (SBU) The Deputy CEO of the Chamber of Commerce (IHK) for Munich and Upper Bavaria, Manfred Goessl, told us that relatively well-situated mid-size companies still had access to credit. However, very small and larger companies were in trouble at the bank. Bavarian Finance Minister Georg Fahrenschon (CSU) confirmed this view in media interviews, stating that companies that sought loan volumes between 10 and 50 million Euros were affected, referring to the same kind of larger SME, typically plant engineering and construction firms involved in large-scale projects, that Goessl mentioned. Although banks were still writing loans, Fahrenschon added that the problem was also a psychological one, driven by a wide-spread fear that a real credit crunch was coming. ¶3. (SBU) Automotive suppliers are indeed affected, according to a senior contact at BMW. He told us that around 100 BMW suppliers worldwide were in trouble and that particularly German and Bavarian suppliers had loan access and liquidity problems. In contrast to SME suppliers, BMW itself was "pretty well off," he reported. "Our creditworthiness helped us to regain good loan access to cover our annual refinancing needs of 25-30 billion Euros albeit at higher interest rates," he reported. Finance Minister Fahrenschon has said with respect to the automotive supply sector that entrepreneurs were complaining to him about their house banks rejecting credits based solely on the business sector in which they were active. Banks are Creating Their Own Negative Reality -------------- ¶4. (SBU) In the case of small companies, banks want to avoid credit defaults that could arise after small businesses run into trouble in this tight economy, Goessl said. Over 80 percent of the loans for small companies in Germany come from savings banks (Sparkassen) and credit unions (Raiffeisenbanken),both of which have not suffered as much in the crisis due to their rather conservative business models and which should be able to lend. However, both Goessl and Fahrenschon observed that these banks are making credits dearer and are increasing their creditworthiness standards in order to guard against a breach of European capital requirements (Basel II). This, they said, could accelerate the credit crunch and become a serious SME problem in 2010. Likewise, larger companies were finding trouble obtaining large credits by the banks' own limited liquidity and by balance sheet rules (Basil II). Solutions Include Positive Attitude and Government Backing -------------- ¶5. (SBU) "In many cases BMW helps out directly. We work together with insolvency administrators and the Bavarian state government to develop joint support programs for our suppliers, our BMW contact said. He noted that most of the problems of automotive suppliers were homemade, and many suppliers had already been at the brink of unprofitability before the crisis. BMW nevertheless also supported the efforts of the German automotive association VDA to urge banks to pay, "do their duty and give out loans, even if not publicly under the name of BMW," he said. ¶6. (U) "We take SME financing concerns seriously," Bavarian Finance Minister Fahrenschon said during a press conference in the CSU MUNICH 00000197 002 OF 002 headquarters recently. He introduced "Financing Initiative Bavaria," a concept emphasizing improved communication between private banks and development banks to ensure liquidity supply. "In recent weeks I received many letters from companies, which already had received approval for governmental loan guarantees, but their house banks would not play along," Fahrenschon said. The CSU plans to install ombudsmen throughout the state of Bavaria, to whom these companies can turn for help. Fahrenschon hopes that these ombudsmen will act as go-betweens for businesses and the state and federal development banks. In informal talks after the press conference he added that he and his Ministry had already succeeded in several hundred such negotiations. Comment -------------- ¶7. (SBU) Economic luminaries like Prof. Hans-Werner Sinn from the influential Munich Institute for Economic Research IFO have told us earlier that a credit crunch in Germany was inevitable if the government decides against the recapitalization of stricken banks and at the same time sticks to the capital requirements of Basel II. This currently is still the case. In light of the upcoming Bundestag election, politicians obviously do not want to draw a too-dim picture of the situation, and the fact that large companies with high creditworthiness like BMW regained good access to liquidity feeds these hopes. On the other hand, the behavior of savings and credit union banks is alarming, as they are failing in important ways to serve the SMEs that depend on them. ¶8. (U) Consulate General Munich coordinated this report with Embassy Berlin ¶9. (U) Track Munich reporting at the classified link - http://www.intelink.sgov.gov/wiki/Portal:Germ any HELLMAN