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December 21, 2009

Credit crunch? More a topic for the eurozone than for Germany

Worries about a possible credit crunch are not receding in Germany, despite the fact that German companies have relatively low debt levels compared to other European countries and are largely able to finance their investments from write-downs and profits. Their competitors in other European countries depend to a greater degree on external financing.

Jörg Krämer, Chief Economist at Commerzbank: "German companies have been able to reduce their liabilities to 77% of gross domestic product over the last few years, which makes them significantly less dependent on lending than companies in the rest of the eurozone, whose debt ratio has risen markedly to a current level of 122%. Why are our companies in a better position? Profits rose year-on-year from 2004 onwards, to a record level in 2008 of just under 15% of gross domestic product. This internal source of finance – stemming from a significant increase in undistributed profits and write-downs – has meant that since 2002, German companies have been able to finance their greatly increased investments almost entirely from their own resources.

That is not the case in the rest of the eurozone, where companies have had to engage in significant external borrowing, equivalent to 15% of gross domestic product averaged out over the last few years. This rose even higher to 21% in 2008. Krämer: "Many European companies are only able to finance around three-quarters of their investment activities themselves. The remainder is liable to external financing premiums, which will place a considerable burden on investment activity."

According to the ECB, the financial crisis has meant that banks in the eurozone have tightened up their lending criteria. Krämer: "German companies are less dependent on external financing than their European competitors. They will be less affected by any contraction in the level of available credit, which is a typical consequence of financial crises."

An International Monetary Fund Working Paper states that credit levels stagnate at (and even intermittently sink below) the crisis level for an average of two years after the end of recessions accompanied by financial crises. This does not normally lead to a return to recession, butit does mean that although economic growth usually continues, it does so at a markedly slower pace.

Press contact:

Michael Machauer: +49 2 63 5 70 79

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