Things in Germany are Hotting Up

Two pieces from the FT today give a clear indication that we could have a long hot summer, followed by an even longer cold winter opening up in front of us. First the growing crisis in Germany's life assurance industry:

Germany's financial regulator on Thursday night sent a life assurer into insolvency for the first time in more than 50 years, after losing patience with Mannheimer Lebensversicherung. The assets and liabilities of the life assurance unit of Mannheimer, which is a prominent medium-sized insurer, will be transferred into Protektor, a pan-industry safety net that was set up last year to safeguard policyholders' investments. The move opens up the prospect of other failures among life assurers and is likely to shake up Germany's fragmented insurance sector, concentrating new business among the market leaders, such as Allianz and Munich Re. Analysts said that the move - which followed months of rescue efforts by the company and the GDV, the insurance industry association - was also a black day for chancellor Gerhard Schr?der and his plans to persuade Germans to invest for their own retirement, rather than relying on the state. Wolfgang Rief, credit analyst at Standard & Poor's, said: "For the integrity of the life insurance industry as a whole, nothing is worse than a negative image." Mannheimer's fate was effectively sealed on Wednesday, when the GDV failed to win the 90 per cent approval necessary from its members to launch a Euro370m ($428m) capital raising to which they would subscribe.

Previous attempts to secure a rights issue had been blocked by the company's shareholders, which include Munich Re. Analysts estimated that Mannheimer's failure would trigger a write-down of at least €25m for Munich Re, which had a 10 per cent stake in the group. Under the Protektor scheme - which has until now remained dormant - the customers of Mannheimer will continue to receive a statutory minimum return on their investments. Industry insiders said that the decision by BaFin, the regulator, to call a halt to rescue attempts followed the failure of last-ditch negotiations yesterday between Bernd Michaels, GDV chairman, and BaFin bosses. One person who is close to the regulator said: "We have been in talks for a long time. Finally, we lost patience." Analysts said that the stance was another show of force from a tough new-look regulator that has previously been saddled with a soft reputation. "Jochen Sanio [the head of BaFin] is definitely flexing his muscles," said one observer. In less than a week, BaFin has produced a damning report on the failure of risk controls at WestLB's principal finance unit as well as triggering Mannheimer's demise.
Source: Financial Times
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And now the growing argument over the lack of sympathetic ears:

The European Central Bank president told Germany on Thursday to live up to its fiscal promises and cut borrowing to boost investor confidence.Wim Duisenberg said the 2004 budget plan drawn up by Hans Eichel, finance minister, was a "cause for concern" because it would make government debts rise when they should fall. His rebuke came after Mr Eichel revealed plans that will require a steep rise in net new borrowing to €23.8bn, and are expected to lead to Germany breaching European Union budget rules for a second year.Germany's budget deficit in 2002 exceeded the 3 per cent of gross domestic product limit set by the stability and growth pact and is expected to do so again this year and next. The finances of the eurozone's biggest economy are expected to deteriorate further if Berlin brings forward €18bn of tax cuts next year.

Mr Eichel deflected questions about cuts until this weekend's rare conclave of ministers and coalition party leaders. Reacting to the plans, Pedro Solbes, the EU's monetary affairs commissioner, said Berlin could not count on the commission's support if fiscal rules were breached. But amid fears Germany's stagnating economy, already in technical recession after two quarters of contraction, could sink into a deflationary spiral, Berlin has little option but to ease budgetary reins to stimulate growth. Robert Prior of HSBC said: "It is the only weapon it has left . . . it cannot cut interest rates and it cannot devalue." But Mr Duisenberg said Germany needed "to do everything to generate confidence" to overcome its economic weakness. For that to happen, the government must stick to agreements.
Source: Financial Times
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The terrible incomprehension of Germany's problems revealed in the above is really staggering. I have a horrible feeling we are watching history in the making here. A great tragedy is about to come upon us, and we all seem powerless to stop it. To be sure there is no easy solution, but as Eddie indicated yesterday, sometimes in economics timing is everything, and this is not the time to pin down a German economy already hamstrung by euro commitments. (Come to think of it, why not ask some of the others to 'cough-up' for a change and send 'extra structural funds' back to Germany!!!). The only end-game here will be to instill the fear of god in an already highly risk-averse German population, and no good can come from that. It would almost seem comic to talk of a 'confidence' element here. What we need to do is avoid upping-the-ante on the 'panic' register. Because panic is what we may have to face if, after all the soothing talk that there is nothing to worry about, the combined 'best efforts' of Brussels, Frankfurt and Berlin fail to ease the Titanic back onto its course (or if you prefer trend growth path, although I hesitate to use that term since I fear that that is precisely what the German economy may already be on). It's the potential sense of impotency that worries me, and the associated rage which may then follow.