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Analysis: German bankers in denial-I

By SAM VAKNIN, UPI Senior Business Correspondent

SKOPJE, Macedonia, Oct. 2 (UPI) -- Denial is a ubiquitous psychological defense mechanism. It involves the repression of bad news, unpleasant information, and anxiety-inducing experiences. Judging by the German press, the country is in a state of denial regarding the waning health of its economy and the dwindling fortunes of its financial system.

Commerzbank, Germany's fourth-largest lender, has seen its shares decimated by more than 80 percent to a 19-year low, having increased its loan-loss provisions to cover flood-submerged east German debts. Faced with a precipitous drop in net profit, it reacted reflexively by sacking yet more staff. The shares of many other German banks trade below book value.

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Dresdner Bank -- Germany's third-largest private establishment -- already trimmed an unprecedented one-fifth of its workforce this year alone. Other leading German banks, such as Deutsche Bank and Hypovereinsbank have resorted to panic selling of equity portfolios, real estate, non-core activities and securitized assets to patch up their ailing income statements. Deutsche Bank, for instance, unloaded its U.S. leasing and custody businesses.

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On Sept. 19, Moody's changed its outlook for Germany's largest banks from "stable" to "negative." In a scathing remark, it said: "The rating agency stated several times already that current difficult economic conditions that are hurting the banking business in Germany come on top of the legacy of past strategies that were less focused on strengthening the banks' recurring earning power. Indeed, the German private-sector banks, as a group, remain among the lowest-performing large European banks."

Last week, Fitch Ratings, the international agency, followed suit and downgraded the long-term, short-term and individual ratings of Dresdner Bank and of Bayerische Hypo- und Vereinsbank.

These were only the last in a series of negative outlooks pertaining to German insurers and banks. It is ironic that Fitch cited the "bear equity markets (that) have taken their toll not only on trading results but also on sales to private customers, the fund management business and on corporate finance."

Germans used to be immune to the stock exchange and its lures until they were caught in the frenzied global equities bubble. Moody's observes wryly that "a material and stable retail franchise in its home market, even if more modestly profitable, can and does represent a reliable line of defense against temporary difficulties in financial and wholesale markets."

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The technology-laden and scandal-ridden Neuer Markt -- Europe's answer to America's NASDAQ -- as well as the SMAX exchange for small-caps are being shut down, the former having lost a staggering 96 percent of its value since March 2000.

This compared to Britain's AIM, which lost "only" half its worth. Even Britain's infamous FTSE-TechMARK faded by a "mere" 88 percent.

Only one company floated on the Neuer Markt this year, compared to more than 130 two years ago. In an unprecedented show of "no-confidence," more than 40 companies withdrew their listings last year. The main stock exchange, the Deutsche Borse, promised to create two new classes of shares on the Frankfurt Stock Exchange. It belatedly vowed to introduce more transparency and openness to foreign investors.

Banks have been accused by irate customers of helping to list inappropriate firms and providing fraudulent advisory services. Court cases are pending against the likes of Commerzbank. These proceedings may dash the bank's hopes to move from retail into private banking.

To compound matters, Germany is in the throes of a tsunami of corporate insolvencies. This long-overdue restructuring, though beneficial in the long run, couldn't have transpired at a worse time, as far as the banks go. Massive provisions and write-downs have voraciously consumed their capital base even as operating profits have plummeted. This double whammy more than eroded the benefits of their painful cost-cutting measures.

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German banks, not unlike Japanese ones, maintain incestuous relationships with their clients. When it finally collapsed in April, Philip Holzmann AG owed billions to Deutsche Bank -- with whom it had a cordial working relationship for more than a century. But the bank also owned 19.6 percent of the ailing construction behemoth and chaired its supervisory board -- the relics of previous shambolic rescue packages.


Part 2 of this analysis will appear Thursday. Send your comments to: [email protected]

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