Banks May Thwart Germany's Economic Recovery

Banks in Germany are under increasing pressure to do more long-term lending to help Europe's largest economy recover more quickly from the recession. There's also concern German banks are in denial about the long-term impact of toxic debt. One financial regulator estimates there's more than $1 trillion of bad debt on the banks' books.

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STEVE INSKEEP, host:

Europe's biggest economy is in recession. And Germany's banks also face criticism that may sound familiar to Americans. They're under pressure to lend more and clean up their toxic assets.

Here's NPR's Eric Westervelt.

ERIC WESTERVELT: Talk to German bankers and they deny there is any credit crunch. They say short-term lending, loans of up to one year, is up nearly 16 percent from the same period last year. But the bigger loans over longer terms are down about a third, and it's those bigger loans that companies in Germany's export-driven economy really need. Alexandra Bern(ph) of Germany's Federal Chamber of Commerce and Industry is worried that poor performance earlier this year will haunt companies in the fall when they apply for loans. And that, she says, could undermine Germany's nascent recovery.

Ms. ALEXANDRA BARANOV: Because the bank sees the figures of the past from the beginning of the year (unintelligible) said no, we cannot give you credit anymore. And especially large companies have big problems to get enough liquidity and credits for banks.

WESTERVELT: There's also concern German banks are in denial about the long-term impact of toxic debt. One financial regulator here estimates there's 800 billion euros - that's more than a trillion dollars - of bad debt on the books of German banks. Some commentators are warning that if more isn't done more quickly to address the issue, the bad debt will cripple the ability of banks to lend. The German government hasn't pushed for banking reform and that's likely to continue. There are national elections in late September and many analysts predict continued political paralysis on key economic issues until after this fall's election.

Eric Westervelt, NPR News, Berlin.

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