US Mortgage Market Takes German Victim, Clouds Outlook | Business| Economy and finance news from a German perspective | DW | 16.01.2008
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US Mortgage Market Takes German Victim, Clouds Outlook

The troubled US subprime-mortgage market took another German victim, and top economic advisers say the worst is yet to come. Little surprise, then, that a key investment-confidence indicator has plunged.

Frankfurt stock market

The Frankfurt stock market took a major fall on Tuesday

Peter Bofinger and Wolfgang Franz, two of the five so-called "wise men" who act as economic advisers to the German government, said the peak of the financial market crisis has not yet been reached.

"I expect the peak of the financial crisis to be reached at mid-year," Bofinger told the Berliner Zeitung newspaper.

Bofinger said he wasn't surprised by an overall sell-off on the DAX on Tuesday, Jan. 15, after German real-estate investment firm Hypo Real Estate plunged a dizzying 35 percent -- the steepest one-day price drop the Dax has seen to date.

The fall came after the company announced it was writing off 390 million euros ($580 million) on US subprime debt losses. Shares had made back some gains in early Wednesday trading.

Effects of US real-estate pressure

Investors were taken by surprise by the write-off, because Hypo Real Estate's management had repeatedly said that the firm would be unscathed by the credit crunch, which has swept world markets.

Man looking hopeful on a stock market trading floor

Hope for better days even as investor confidence slumped in Germany in January

"The interest rate adjustments for buyers of US real estate are now coming into effect, and that is steadily increasing pressure on real estate markets," Bofinger told the Berliner Zeitung.

Meanwhile, Franz said the financial market crisis is not yet over, adding that interest-rate increases for mortgages, which are now coming into effect, will "create problems for some debtors, increasing the likelihood of defaults at banks and also here in Germany."

Investors eye US for recession signals

Hypo Real Estate's announcement on Tuesday came in the wake of more grim news out of the US financial sector; America's biggest bank, Citigroup, reported that it suffered a record $9.83 billion fourth-quarter loss.

Meanwhile, concerns that a possible US recession will deepen the slowdown in Europe's largest economy pushed down a key German investor-confidence index. A study by the ZEW Center for European Economic Research published on Tuesday showed investor confidence in Germany fell to its lowest point in 15 years.

Investor confidence was at minus 41.6, from minus 37.2 a month earlier -- the eighth straight decline. It was a greater drop than analysts had expected.

Frankfurt stock market

Hypo Real Estate took one of the biggest falls in Dax history

Goldman Sachs and Merrill Lynch have forecast that the US will slip into recession this year for the first time since 2001, as the housing slump, which has driven up credit costs globally, curbs consumer spending.

That may hurt European exporters already grappling with oil prices around $100 a barrel and an appreciating euro.

German growth is slowing

"The bad news flow from the US banking sector hasn't abated,'' Alexander Koch, an economist at Unicredit Markets and Investments in Munich, told Bloomberg news service. "There are real concerns about a US recession dragging down German economic growth.''

German economic growth slowed to 2.5 percent last year from 2.9 percent in 2006, which was the fastest expansion since the turn of the decade, the Federal Statistics office said on Wednesday. The Bundesbank predicts growth of just 1.9 percent this year.

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