Fears grow over nascent German recovery

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Two months ago, Karl Haux, who owns a high-performance grinding machine maker in southern Germany, received a letter that promised an end to his company’s plight.

After 10 months in which Mr Haux received not a single order, a customer confirmed his willingness to spend €1.5m ($2.2m, £1.4m) on a large machine, enough to secure the company’s future for at least a year.

Several days later, the 63-year-old company owner was shocked to find out that one of the three banks he regularly dealt with had backed away from an earlier pledge to finance the working capital for the new order.

“The bank has even put existing credit lines into question, which made it impossible for the other two banks to give me the new loan,” Mr Haux says.

On August 13, he went to the local district court to declare insolvency of the small company, with 37 staff, he had founded.

Such examples are now more frequent and are fuelling fears in German business that difficulties in obtaining loans could seriously harm the nascent economic recovery of Europe’s largest economy, which is expected to return to growth in 2010 after contracting by 5 per cent this year. German industrial orders rose 1.4 per cent in August, according to data on Wednesday that confirmed a strong upward trend. But executives fret companies will not be able to obtain the working capital needed to finance orders that have started to pour back in.

Georg Knoth, head of General Electric in Germany, Austria and Switzerland, says: “There is a credit shortage when it comes to syndicated loans, credit to small companies and to risky sectors such as the automotive industry.”

Economists have not yet spotted any signs of a full-blown credit crunch, but they warn it could materialise in the near future.

The German Bundesbank says in its most recent monthly report that it does not see any evidence of a credit shortage.

“However, it is possible that the credit supply of banks will lag behind companies’ demands in the early stages of the looming gradual process of economic recovery,” it said.

Bankers and managers have warned that next year will be critical, as banks, already under pressure to deleverage, may be tempted to draw back on credit commitments on the back of companies’ presumably dire 2009 results.

“We believe that the worst phase will be in the middle of next year. By then, banks will asses companies’ ratings and will see the 2009 balance sheets,” said Ulrich Schröder, head of the state-owned KfW bank, recently.

Germany’s often small and family owned Mittelstand engineering companies, which employ more than 900,000 staff, are particularly in danger. These companies often depend heavily on bank financing as they mostly lack access to capital markets.

“We are worried that companies that have performed well in recent years will be threatened in their existence”, says Josef Trischler, head of business administration at VDMA, the German engineering association. He adds that banks have already tightened loan standards and increased fees.

“The banks are asking for more collateral, raise interest rates and take much more time to handle credit requests,” he says. This was confirmed by an August KfW survey among finance experts from business associations, where 41 per cent, a third more than half a year earlier, reported more difficult credit conditions.

“There will be a large wave of insolvencies as credit has become too scarce and too expensive,” a German private equity manager predicts.

The economic recovery could thus become more of a curse than a blessing for a series of company owners such as Mr Haux.

Mr Haux says he will continue working – unpaid – for the company he no longer owns. “I have lost the company and there is no chance I will get it back. I do not understand the banks. This has been a really dumb move because the insolvency will cost them a lot of money.”

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