So the credit crunch is largely behind us, and now all we have to do is worry about the recession, right? Well, no. The credit crunch is alive and well, and its latest big victim is Commerzbank. And yes, you read that right: it's a German bank.
Having chastised other western governments for injecting state capital into ailing banks to the tune of £37bn in the case of the UK German chancellor Angela Merkel is eating humble pie. That's because having injected €8.2bn of capital into Commerzbank in November, the German government has just handed over another €10bn.
As the FT's Lex notes, that takes the total outlay on the bank to €18.2bn compared to its market capitalisation of just under €4bn. And it hands the German state an effective stake of 25% plus one share in Commerzbank which is tantamount to a partial privatisation of the country's second largest lender. So what's going wrong for the Germans?
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Pretty much the same things that are going wrong at banks all over the world falling asset prices and the frantic rush to "deleverage" reduce risk. It seems Commerzbank has had a bout of indigestion in its recent attempts to swallow up rival Dresdner Bank very similar to that suffered by Lloydstsb after it agreed to buy HBOS. In both cases the targets were what Christopher Hughes on breakingviews.com calls "bigger basket cases than expected". In other words, they are loaded with toxic debt from the rash lending policies of the boom years.
Martin Blessing, the chief executive of Commerzbank, claims that the government's action is simply to "weather-proof the bank for an economically stormy environment". But there's more to it than that. For starters the sheer scale of the latest injection underlines the threat to one of Germany's, indeed Europe's, biggest financial institutions. Having snapped up the once buoyant Dresdner Bank, Commerzbank has been left with a rotting corpse sitting heavily in its bowels Analysts believe Dresdner still carries a broad exposure to complex debt securities now plummeting in value. So the government probably had little choice but to intervene, and fast.
And when it became obvious that one of the jewels in the German crown needed help, Merkel found herself between a rock and a hard place. She has been vociferous in her criticism of both sovereign wealth funds and UK-style bailouts, but the fear of Commerzbank slipping into the hands of foreigners seems to have won out. Indeed the terms of the German government rescue seem to have been designed to edge out any likely competition they are somewhat softer than those imposed by Gordon Brown on UK banks. No wonder the details are still being "clarified" with the European Commission. At the very least the EC will demand an explanation for this unexpected bout of German government largesse.
For investors this latest action is nothing but bad news. After all Germany is the country with a reputation, which they have been happy to crow about, for caution and thrift. Not any more. Batty lending practices were clearly universal and that means the crunch has the potential to wreak plenty more havoc on the banking system in the months ahead.
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