How Germany handles interest rates
by B.A. Santamaria
News Weekly, May 3, 1997
The Howard Government is obviously under considerable pressure particularly in country electorates. Superficially the most pressing challenge arises from the turmoil occasioned by the High Court's 4-3 verdict in the Wik Case, which has resulted in the first credible threat by the National Party to terminate the coalition.
The real problem, however, goes far deeper. The disillusionment of rural voters arises from the visible disintegration of rural communities throughout the nation, as a result of the closing down of Commonwealth and State services, of hospitals and health facilities, of banks, schools and shops in all country districts. Within the past two decades, rural Australia has lost 40% of its population. This physical disintegration of families and rural communities exacerbates the factors leading to the loss of social and moral cohesion throughout Australia.
The present Government is as much a party to this disintegration as was its predecessor. Reduced to 100,000 rural holdings, compared with over 200,000 in the 1960s; with a massive rural debt of approximately $17 billion; interest rates at around 15% p.a.; both coalition parties are losing the sympathy and support of the very country people who voted so overwhelmingly against the Keating Government in the last election. There are many other contributing factors, but the most important is the rural interest rate, which makes it impossible to recover from climatic factors like drought, or sudden market failures like wool.
What a serious Government, with a serious interest in governing, can do is illustrated by the German Government. As a result of the transfer of many of the plants of some of the largest German companies to the low wage countries of Eastern Europe, Germany's has risen to almost five million. But without the provision of low interest funds to create new firms and to strengthen those which already exist by Germany's long-term development bank, the situation would have deteriorated even more rapidly.
This bank is the Kreditanstalt fur Weideraufbau (KfW). The KfW's task is to supply financial support for small and medium size enterprises, both industrial and agricultural, together with the financing of public works programs. Backed by the Government, it enjoys an AAA credit rating. As well as providing funds for infrastructure improvements, environmental protection and housing modernisation, the KfW supports banks in Central and Eastern Europe.
The bank's capital is 1 billion deutschmarks or $A770 million. (Further figures will be expressed in $As). 80% of this capital is held by the Federal Government and the remainder by the Lander (States). It is thus a Government bank, as the Commonwealth Bank once was in Australia before it was "degutted" and finally sold. At the end of 1995, the KfW's capital and reserves - in Australian dollars - amounted to over $6.8 billion. Its balance sheet tops $A192 billion making it one of Germany's larger banks.
"EQUALISER" FOR SMALL FIRMS
Among its other roles the KfW acts as an "equaliser" in providing cheap credit for smaller businesses whose sole credit option is the local branch of a major bank.
The KfW acts as an intermediary, using its gold-plated credit rating to get cheap funds which it then channels to small enterprises. Cheap money and the generous loan conditions which are attached, means that German business has a great advantage over competitors in other countries.
At a press conference on January 30, 1997, KfW management provided details of the bank's operations in 1996.
The KfW committed loans, grants and guarantees of $A39 billion, an increase of 20 percent on the previous year. It lent $A14.3 billion to industry, $A7.7 billion for housing and $A3.2 billion for "community infrastructure" These loans supported an investment volume of $A54 billion which created or secured the jobs of 1.2 million Germans (250,000 of which are in the former East Germany).
According to the bank, its "Program for Small and Medium-sized Business" serves the long-term financing of investments at a favourable interest rate. The special advantage for the borrower is that its loans are long-term and that the interest rate is fixed for the entire term and thus constitutes a reliable basis for his calculations.
On February 7, 1997, the interest rate for investments in West Germany, fixed for the entire term (usually up to 10 years) was 4.75% The rate in the new Lander (what was East Germany) was a little less, 4.5%. Such loans carry a two-year grace period before capital or interest payments have to be made.
For investments in real estate and construction, a 20-year loan (with 3 grace years) is available with an interest rate of 5.25 percent in the old states and 5 percent in the new.
The impact of the KfW on the small and medium-sized business sector has been and remains enormous.
Germany, for instance, dominates the world's precision tooling trade; and the German precision tool industry is dominated by family firms. It is difficult to see how they could have succeeded without their ability to access cheap funds to start up and later to expand.
Whether one looks at Germany, Japan, Singapore or Taiwan, the ability to finance infrastructure, housing, small business and agriculture at 5% or less is the key factor in explaining their success and Australia's failure. The most recent figures released by the Bureau of Statistics show that employment in Australia fell by 34,000 between February and March, of which the greater part were full-time jobs.
It ought to be perfectly clear that unless - as far as the availability and cost of credit is concerned - Australia can place itself in a similar situation to Germany's, no recovery is possible.