Today We Rule Germany, Tomorrow We Rue The World

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The English speaking world has paid a lot of attention to the failures of Northern Rock, Countrywide and all the Wall Street institutions that have had to seek capital infusions to stay afloat in recent months. But the situation in Germany is arguably even worse. The public banks--state owned, partially state owned or dependent on public sector funds--have run into such trouble that one of the key pillars of the banking system is threatened, according to Wolfgang Reuter's article in Der Spiegel.
"The state-owned banks are supposed to bail each other out when necessary, but the problem is that many are in trouble themselves and hardly in a position to help their peers. And things could get even worse," he writes.
Why are Germany's banks in such trouble? Reuter cites a "fatal mix of amateurism, greed and political protection" but what it really seems to come down to is moral hazard. Aware that they were walking a tight rope with a safety net to catch them if they stumbled, the bank managers took irresponsible risks.
Ironically, however, it was the end of state protection, required by the European Union, that sparked a huge push into the riskiest securities.
"In the days of government backing, they were able to borrow money at lower rates, which in turn allowed them to offer loans at lower rates than their private competitors. But that advantage ended in 2005, Reuter writes. "Hard up for funds, many of the public-sector banks began speculating with high-risk securities. According to a former bank executive, many 'literally stocked up on these investments' shortly before the cut-off date."
Enter subprime, and you see exactly where this is going.
German State-Owned Banks on Verge of Collapse [Der Spiegel]

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