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Business

German Businesses Fear Looming Credit Crunch

As banks grow increasingly wary of lending money to each other, Germany's small and medium-sized businesses are beginning to worry they won't be lent the cash they need to expand their operations and buy equipment.

A weaving company in Germany

Some economists are warning that the worst is still to come for German businesses

While governments in Europe scramble to temper the fallout of the banking meltdown and shore up confidence in financial institutions, many small and medium-sized Germany companies are concerned banks will deny them the money they need to keep businesses running.

"The biggest concern is that banks will start issuing fewer loans," Johann Stiegler of the "Mittelstand" federation, as the class of small and medium-sized companies (SMEs) is known, told the AFP news agency.

Often family-run businesses with a few dozen employees, SMEs tend to operate in market niches. But Stiegler said the companies have limited financing options when they want to expand, adding that several institutions that specialized in issuing credit to small companies are struggling through the financial crisis.

Lenders swept up in crisis

A bag with the IKB logo passes from one person to another

German lender IKB was rescued by the state then carried away by a US investment fund

A major German lender, commercial lending bank IKB, invested heavily in the US subprime mortgage market and required a bailout that cost the government over a billion euros before the bank was sold to the US investment fund Lone Star.

"It will be harder and more expensive for companies to obtain credit," Werner Schnappauf, head of the Federation of German Industries (BDI), told the Financial Times Deutschland on Tuesday, Oct. 7.

He also it was certain that the financial crisis would hit the general economy in the coming months.

In addition to increasing raw material prices and a highly valued euro that makes exports more expensive, the current financial crisis led the BDI to estimate German growth would fall to 3.9 percent in 2008 and just 1.9 percent in 2009. Last year German exports grew by 8.5 percent.

Situation could be worse

While business owners may have to wait and see if the banking crisis expands to their industries, they're also being confronted with a set of contradictory messages from their banks. The local cooperative banks SMEs which tend to use loans and credit have so far been unaffected by the current financial turmoil.

The curve of German stock index shown dropping

Plunging markets have so far had only a moderate effect on German SMEs

"It has not become more difficult to give loans," Werner Reuter, who deals with business clients at the Volksbank credit union in the southwestern city of Karlsruhe, told AFP. "There is a certain insecurity ... but there is no sense of panic."

Since the co-ops are invested only in local ventures, they have been sheltered from global crisis that brought international institutions to their knees, he added.

Only two percent of the 4,000 companies that requested credit were denied by their banks, according to a study released Monday by the Creditreform economic research group.

But a growing number of German SMEs said they are pessimistic about future business.

The number of companies that labeled their prospects as "good" or "very good" dropped 4.9 percent to 47 percent and the number who saw the coming year as unsatisfactory grew by 1.4 percent to 5.4 percent.

"The situation is not as negative as the bad news from the financial markets would lead you to believe," Creditreform board member Helmut Roedl told journalists.

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