| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

Home 
 
 News
 Irish
 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 International
 Property
 Innovation
 
 Analysis/Comment
 
 Asia Economy

RSS FEED


How to use our RSS feed

 
Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.

Welcome

Finfacts is Ireland's leading business information site and you are in its business news section.

Links

Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Irish Economy

Global Income Per Capita

Global Cost of Living

Irish Tax - Income/Corporate

Global News

Bloomberg News

CNN Money

Cnet Tech News

Newspapers

Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News

 

Feedback

 

Content Management by interactivetools.com.

Analysis/Comment Last Updated: Aug 23, 2010 - 8:24:15 PM


Business models of debtor states have collapsed; Germany's banks switch from exporting capital to domestic support
By Professor Hans-Werner Sinn
Jun 10, 2010 - 4:03:34 AM

Email this article
 Printer friendly page

From A Preliminary Report on The Sources of Ireland’s Banking Crisis - By Klaus Regling and Max Watson, published June 09, 2010.

Hans-Werner Sinn is Professor of Economics and Public Finance and President of the Ifo Institute for Economic Research at the University of Munich. This article was first published as "Knacks im Geschäftsmodell," in WirtschaftWoche, no. 19, 10 May 2010, p. 38

Across the board, the business models of the debtor states have collapsed. The crisis also has a positive aspect: Germany's banks will no longer primarily send depositors' money abroad but will issue more domestic loans.

Greece is now receiving a lot of money, but not nearly as much as the capital markets kept providing up to the crisis. The country must pursue a strict austerity programme, as must the other debt sinners as well. Due to the increase in risk premiums that investors are demanding, Portugal, Ireland and Spain will have to reduce their capital imports just as the US will have to do, whose bogus securities no one wants any more. The markets for mortgage-backed securities, which in 2006 still had a volume of $1.9trn, collapsed by 97 percent up to last year, and with it a major source of financing the American balance of payments deficit has disappeared.

A crack has also formed in the German business model. Selling cars and equipment on credit is no longer a valid business model because the flow of credit will be blocked from now on. Germany must purchase itself the goods that it produces. The increase in domestic demand needed to achieve this will take place via the capital market. Because of the new fears regarding insecure borrowers, in future the banks will no longer convey the savings of the Germans primarily abroad but will increasingly loan it out to German industry. A recent Ifo survey indicates that firms are already having fewer problems obtaining loans than several months ago.

The write-offs of toxic US papers and the resulting capital losses made banks' lending policies more restrictive. It now appears, however, that this effect has been overcompensated by the reduced foreign investments of German banks. This is a welcome development for Germany. It marks a turnaround in a 15-year trend that caused Germany problems but gave the debtor countries an artificial economic boom.

Greece, the US, Portugal, Ireland and Spain - - all these countries experienced a credit-financed economic boom in the years before the crisis. Whether it was the inventiveness of the US financial jugglers or the putative protection of the euro - - the debtors always managed to conjure up high yields to lure foreign investors and get them to part with their money, which was used to produce a boom in consumption and to stimulate construction spending.

The money for public and private investments came from abroad. The investments stimulated growth, but as always they stimulated demand more than they increased the supply, thus overheating the economy. Wages and prices rose. The countries' competitiveness weakened, which was reflected by the gigantic trade deficits. These deficits were the necessary counterpart of the capital inflows. By definition, a deficit on current account corresponds to the capital imports of a country.

In Germany it was exactly the reverse. Germans loaned out their money instead of investing it. From 1995 up to the outbreak of the crisis in 2008, Germany had an average net investment rate of only 5.3 percent of net domestic product. That was the lowest rate of all OECD countries. In 2008 Germany had saved €277bn in all sectors (private households, businesses and government); that much money was available for net investments, but in fact only €111bn was invested. The lion's share of the savings, €166bn, flowed as capital exports abroad, far too frequently via the dubious businesses of the state banks, for which apparently no risk was great enough.

The result of the capital exports, i.e. the transfer of the rights to utilise economic goods, was that from 1995 to 2008 Germany, after Italy, had the lowest growth rate of all EU countries. To the extent that other countries were artificially bloated by the flow of credit, Germany flagged because of the outflows. It is almost tragic that politicians and journalists celebrated Germany's trade surplus as a sign of strength, overlooking that this was a necessary consequence of the capital flight. If capital leaves a country, its growth slackens as a result, its inflation rate stays low and a trade surplus arises. Germany was such a country. It not only had the lowest investment rate of all OECD countries but precisely for this reason also the lowest inflation rate in the euro zone.

The era of capital exports is now fortunately coming to an end. With the money of its own savers, Germany, once the direct results of the crisis have dissipated, can finance in the medium term an economic boom similar to the one the debtor countries achieved with foreign capital. A sinking surplus is not a problem but a blessing, because it results from the relative improvement in Germany's attractiveness as a business location. Germany can be grateful to the capital markets for turning off the credit taps to the debt sinners.

Related Articles
Related Articles


© Copyright 2010 by Finfacts.com

Top of Page

Analysis/Comment
Latest Headlines
Disastrous 44-year War on Drugs and ignoring the evidence
HSBC & Tax Evasion: France/ Belgium issued criminal charges; UK/ Ireland nothing
Analysis: Germany world's top surplus economy; UK tops deficit ranks
Facts do not always change minds - can even entrench misinformed
Finfacts changes from 2015
Facts of 2014: Guinness not Irish; 110 people own 35% of Russia's wealth
In defence of dissent and Ireland's nattering nabobs of negativism
Dreams of European Growth: France and Italy facing pre-euro economic problems
Globalization's new normal needs permanent underclass - Part 1
MH17 and Gaza: who is responsible?
Israel vs Palestine: Colonization set for major expansion
Aviva Ireland's 'fund' runs dry and life cover to die for
We wish Martin Shanahan - new IDA Ireland chief - well but...
Ireland as an Organised Hypocrisy is in lots of company
Dr Peter Morici: Friday’s US jobs report won’t alter Fed plans to raise interest rates
Own Goal: Could FIFA have picked worse World Cup hosts?
Ireland: Spin and spending will not save bewildered Coalition
Irish Government parties set for 2-year vote buying spending spree
European Parliament: Vote No. 1 for Diarmuid O'Flynn in Ireland South
Dr Peter Morici: US April jobs report may show 215,000 added in April
Dr Peter Morici: Hardly time to call Obamacare a success
Celtic Tiger RIP: Change in conservative Ireland six years after crash
Dr Peter Morici: Five things to know about the Fed’s obsession with inflation
In age of acronym/ Google, Trinity to rebrand as 'Trinity College, the University of Dublin’
Hoeness case part of ‘painful’ change for Swiss bankers
Dr Peter Morici: The Cold War was only on vacation
Dr Peter Morici: US economy drags on Obama's approval ratings; Don’t look for changes in Washington
Dr Peter Morici: Bitcoin debacle shatters the myth of virtual money
Dr Peter Morici: US Tax Reform: Eliminate the income tax and IRS altogether
Wealth threatens the simple life in Gstaad, Switzerland
Irish journalists get cash payouts over 'homophobic' defamation claim
Irish academics get lavish pension top-ups as private pensions struggle
Dr Peter Morici: Inequality is President Obama’s highest priority, but solutions are naive
The Finfacts Troika: Better times ahead and a hangover to forget?
Dr Peter Morici: Volcker Rule arrives with the hidden jewel in Dodd-Frank financial reforms
Ireland's toothless fiscal watchdog threatens to bark
Analysis: Germany's current account surplus - - Part 2
The end of western affluence?
Bono's hypocrisy on Africa, corporate tax avoidance in Ireland
France like Ireland is run for the benefit of the old