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Germany

Germany's Bundesbank Posts Huge Profits for 2008

There's a check in the mail for the German government. That's after the Bundesbank -- the country's national bank -- posted 6.3 billion euros in profits for last year. But falling interest rates could bring a downturn.

500-euro notes

The Bundesbank profits are a windfall for the government

Bundesbank President Axel Weber announced the rise in profits at a news conference in Frankfurt am Main on Tuesday, March 10.

The bank, he said, had earned the equivalent of $8 billion in 2008 -- an increase of around 50 percent over the previous year.

"Despite the hefty increase in reserves, the Bundesbank's profits are markedly higher," Weber said.

The entire sum earned is being transferred to the federal government -- which is something of a novelty. In previous years, portions of the Bundesbank's earnings have had to be used to pay off debt from the former East Germany, but now that the debt is gone, the bank's profits will flow into state coffers.

The additional 6.3 billion euros will come as very welcome news to Chancellor Angela Merkel's government, which is looking for every spare euro it can find after agreeing to engage in deficit spending in an attempt to combat the effects of the global financial and economic crisis.

The government has already promised billions in bail-outs to the banking industry and said it would consider loan guarantees and other rescue measures to other industries.

Prime rate key

Bundesbank President Weber

Bundesbank President Weber had good news and bad news

Weber said most of the bank's profits had been earned from lending money to banks.

"The increase is above all due to profits on interest in euros," Weber explained at the press conference, adding that the increased value of the bank's assets in US dollars and its gold reserves had also contributed to the positive figures.

But that news is also cause for concern due to the current downward trend in European interest rates.

The European Central Bank's prime lending rate prior to the outbreak of the financial crisis in the second half of 2008 stood at 4.25 percent.

The ECB has since slashed it to a mere 1.5 percent, and many commentators are saying further rate decreases, perhaps all the way down to zero, may be necessary.

Such a step could dramatically reduce the Bundesbank's profits for 2009.

No dancing in the streets

Bundesbank

The Bundesbank probably can't expect the same results for 2009

Despite the good coming his own institution, Weber himself painted a gloomy picture of the economic future -- both globally and for Germany in particular.

"Because of declining demands for experts, the German economy is especially affected," he said, referring to the economic crisis.

Weber said he expected the 2009 inflation rate in Germany to be 0 percent -- a figure that gives rise to fears of deflation and worries that the recession could turn into a full-scale economic depression.

But Weber said he did not think deflation was a serious danger.

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