[A-List] Germany: Mittelstand capital crunch

["Michael Keaney" <michael.keaney@xxxxxx>]

More evidence of the growing rift between monopoly & finance capital
(foreign and aspirant global capital) and the SME sector in Germany
(national capital).

In earlier posts I have employed the work of Nicos Poulantzas to highlight
the impact of inward FDI on Germany itself, as the conditions of US monopoly
capitalism began to be replicated within the German economy. In other words,
in order for German capital to compete with US capital, it would have to do
so on terms set by US capital. However, this implies passivity in the
process (itself continuing gradually) on the part of German capital and
institutions -- that US inward investment has triggered this process of
"globalisation". We've mentioned specific events in which German companies
-- Daimler Benz and Deutsche Bank -- have themselves initiated
"Americanisation" by either listing on Wall Street (thereby having to
conform to US institutional norms) or emulating US norms in order to compete
at a global level. German companies have also been expanding operations in
East Asia, however, in part using US finance capital to do so (e.g. Daimler
Benz in Japan and South Korea, Allianz in South Korea). In other words this
is not a passive process in which US capital, an independent variable,
determines the future development trajectory of German capitalism, a
dependent variable. It's more complex, not least because of elements of
German capital desirous of breaking out of their perceived national
straitjacket. This perhaps explains the continuance of London as an
international financial centre. Forget Greenspan and others praising the UK
decision to stay out of the eurozone and thereby defying the doomsayers who
thought that Frankfurt would supplant London as Europe's financial centre of
gravity. The fact is that the regulatory environment offered by London is
much more amenable to the expansionist ambitions of German monopoly and
finance capital than Frankfurt, although this is slowly changing. Schröder
has already set up a regulatory regime similar to that installed by New
Labour in Britain and the social democrats in Sweden. What remains to be
done is the untangling of the German state from the financial sector as it
is presently configured -- a messy and tortuous process that will take a
long time to achieve and will cause much wailing and gnashing of teeth, as
evidenced by the pain and suffering caused by the negotiations for the EU
takeover directive which, if implemented, would effectively outlaw the
institutional protections used by German companies to shield themselves from
foreign takeover. Schröder's task is to somehow manage all of this, holding
together a coalition analogous to that held by Wilson and Callaghan in 1970s
Britain -- monopoly capital and organised labour. Thus no wonder Schröder
presides over a deep crisis, not least because of the fragility of his
coalition. His electoral opponent, Stoiber, could not clearly align himself
with national capital because his support base was too dependent on those
elements of financial capital that wish to "modernise" and get out from
under the weight of regulations and institutions that traditionally have
driven the development of the Mittelstand -- including the state
governments, one of which, Bavaria, is the very source of Stoiber's claims
to legitimacy. What a mess.

For the foreseeable future it is likely that Schröder will muddle through as
did Callaghan. However, should he have to turn on organised labour, like
Callaghan before, he better hope that in the meantime finance capital and
the Mittelstand have not formed their own alliance of convenience, otherwise
Germany will get its own Thatcher (in the form of Lothar Späth?), who will
then proceed to "modernise" the country by preaching the virtues of
enterprise whilst ensuring that the manufacturing base of the country gets
hollowed out for the benefit of the financial sector. Of course these
speculations are just that -- speculative. Whatever happens in Germany will
have German characteristics, and it is unlikely for all sorts of historical
and institutional reasons that history would repeat itself down to the fine
details. Nevertheless, Britain, very much for the worse, led the way and
while it is visibly crippled by its leadership (e.g. infrastructure crisis)
the rewards of such abject failure might prove tempting enough for those
capitalists and their political satraps tired of making only big bucks and
wishing to make instead gigantic bucks by liquidating "social capital" in
the manner pioneered by Thatcher at the IMF's behest.

-----

Mittelstand hit by crunch
German banks are putting small companies under pressure, says Uta
Harnischfeger
Financial Times, November 18 2002

Wolfgang Henjes, who heads a small Lower-Saxony glass machine manufacturer,
received seven days' notice before his bank cancelled his E200,000
($202,000) overdraft facility. A few weeks later, Mr Henjes filed for
insolvency, joining the ranks of 45,000 others expected to do so in Germany
this year.

"In the summer, when it doesn't rain, the banks come and offer an umbrella
-- but they take it away as soon as it starts to dribble," Mr Henjes says.
"After working out a complete financing concept for us two years ago, our
bank didn't even have the decency to come and talk to us," he says.

Mr Henjes, who is now working out a transitional solution with his
creditors, says that Dresdner Bank pulled the trigger after he asked them to
restructure his several-million-euro loan.

Mr Henjes' story highlights the raging debate about the credit crunch that
has hit the German Mittelstand, the thousands of small and medium-sized
companies that form the backbone of the German economy. Stories abound about
banks cancelling long-standing relationships.

"I have heard of plenty of such cases," says Klaus Spitzley, chief financial
officer at Wittenstein, a Swabian maker of servo gear drives. Nevertheless
Mr Spitzley says his company has not encountered any problems securing
finance recently.

As banks seek higher returns on their lending and demand to take a closer
look at borrowers' books, the Mittelstand cries foul.

Germany's small and medium-sized companies reproach banks for leaving them
out in the cold by applying new ratings guidelines too inflexibly, making
new loans expensive and time-consuming.

"In search of higher return on equity, German banks are starting to turn
away lower margin corporate business. The result is that many German
companies, especially smaller unquoted businesses, are struggling to get
bank finance," says Merrill Lynch's Michael Hartnett.

Every third German company says it has become more difficult to access bank
credit, according to a survey by Kreditanstalt für Wiederaufbau, the German
state-owned development bank. German banks approved 7 per cent fewer new
credits in the year to March, with listed banks granting 16 per cent less.

The timing could hardly be worse. With Germany's economy teetering on the
brink of a recession, 4m unemployed and a record number of insolvencies, the
cosy relationship between lenders and their borrowers is falling apart. The
growing absence of easy financing has become the latest boon for the
country.

Likewise, it was the abundance of cheap loans that was crucial for Germany's
post-war boom.

Corporate credits were basically subsidised because public-sector banks,
which account for 90 per cent of German banking, could offer cheap
conditions due to state guarantees and the lack of dividends. Listed banks
were forced to play along.

Now reality is biting. As changes in the banking sector -- the new Basle II
rules governing bank loans and Mario Monti's crackdown on German
public-sector banks -- take effect, German borrowers are confronted with
painful truths. Suddenly it is not enough to live next door to the banker.

"Basle II replaces a system where it was sometimes good for the borrower to
know the banker from the local golf club," says Christoph Hedrich, economist
at Commerzbank.

To make matters worse, Germany's large private banks, such as Deutsche Bank,
HVB and Commerzbank, must boost their profits if they want to catch up with
their international peers. At the same time, they are forced to take growing
provisions for bad loans.

Because Basle II forces banks to scrutinise their customers more closely,
including estimating a company's probability of default and soft factors
such as operational and entrepreneurial risks, loans will become more
expensive and, above all, labour-intensive.

Small companies complain that demands for timely and detailed controlling
reports will break their neck, coming on top of already high non-wage costs
and taxes.

"We already face an overbloated bureaucracy," says Thomas Keidel, chief
executive at Mahr, which produces measuring devices. He is concerned that
the banks do not differentiate. "One of these young banking blokes will rush
through his list of ratios -- he has no idea how our business works."

Spoilt by cheap loans, the German Mittelstand has comparatively low equity
capital ratios. As a result, it has rarely looked for alternative funding.
The recent stock market sell-off and volatile private equity have not helped
either.

But if, in the future, it takes more than a handshake to get a corporate
loan, many Mittelstand companies may be forced to consider alternative
financing, even if it is uncomfortable. "But the problem with equity capital
finance is that somebody from outside enters the decision process," says Mr
Spitzley.