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Monday, November 04, 2002

Germany mirroring Japan's problems

This interesting topic has been picked up by a fiancial editor at the Guardian of all places, although he still has twigged the possible importance of the common demographics:

Has Germany caught the Japanese disease? Is the world's third largest economy about to be trapped in the same spiral of deflation and stagnation that has bedevilled the second largest for the best part of a decade?
On the face of it, the signs do not look good. Germany has seen the same collapse in asset prices - the stock market and the east German commercial property sector - that did so much to put Japan on a downhill path.

Germany's two biggest publicly-listed banks, Deutsche Bank and HVB, are both under financial pressure, having recently reported third quarter losses. The third, Commerzbank, has hinted it may finish the year in the red. The reason is a combination of high costs (the cost income ratios of German banks are close to half as much again as their UK peers) and soaring provisions to cope with bad and doubtful debts. German banks just don't make big enough profits to ride out the problem of loans going bad as the economy stagnates. Cut to Japan, where the government has recently compromised on plans to tackle the bad debts of the banking system. Compromised as in bottled, that is, as the banks and their political backers forced the authorities to tone down an initial hard-nosed approach.

The snag for policy makers is that simultaneous problems with the economy and the banking system are self-reinforcing. As the economy deteriorates, more companies go bust, leaving the banks with more bad debts. That makes them more cautious about future lending, which means companies can't get the cash to invest, which means the economy slows, which means more bankruptcies... well, you get the idea. Many mittelstand companies are already reporting problems raising cash, either through more onerous conditions being attached to loans or through outright refusal. Lombard Street Research's Professor Tim Congdon, in a recent persuasive analysis of the problems besetting the two countries, notes the parallels between Germany and Japan - though he is cautious about jumping to conclusions too quickly. "The overall verdict has to be that the German banking system is in serious trouble," he says. "Germany may not have caught the Japanese disease, but it is vulnerable." Should we despair that two of the world's leading economic players are in such serious trouble, albeit one rather worse, to date, than the other? Maybe not. According to a US think tank last week, the answer to the Japanese problem is to be found in Silicon Valley. The Pacific Council on International Policy reckons the solution lies in harnessing foreign technical and entrepreneurial skills just as the Californian high-tech sector did. "The central role of foreigners in the Silicon Valley story is among the reasons some Japanese leaders are coming round to the idea of easing restrictions on immigrants," says Pete Wilson, head of the PCIP's task force and a former governor of California.
Source: The Guardian

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