115 billion euros, no takers?

Imagine 115 billion euros are put into a pot that no one wants to reach into. The stash of money, better known as the "Deutschlandfond" or "Germany Fund", was set up by the government in spring this year to support businesses hit by the financial crisis. But it has so far met with what appears to be a rather muted response. Only 13 billion euros ($19 billion) have been applied for or paid out to date, the KfW state bank in charge of administering the program reported on Monday.

Companies want credit not guarantees

The fund is made up of 75 billion euros in state guarantees and 15 billion euros in loans available to medium-sized businesses. Large companies can apply for funds from another credit line totaling 25 billion euros. Even though the Germany Funds are set to run until the end of 2010, it comes as a surprise that in a little over a quarter of its life time only a tenth of the money has found potential takers.

It is not necessarily a bad surprise, some experts have said. The sheer size of the fund was meant to inspire the confidence that kept businesses away from the state trough. This is reflected in the fact that state guarantees comprising the largest part of the fund, have barely been drawn on.

It is a different story for the loans side of the Germany Fund. KfW spokeswoman Christine Volk said that the 13 billion euros dished out in loans already make up a third of the total amount available until 2010.

"After a slow start, there's healthy demand for the scheme now," she said.

Banks only lend to medium players

By far most requests for credit come from small and medium sized businesses, Volk said.

"Some 93 percent of all claimants ask for loans of less than 10 million euros," she said, explaining that banks are still hesitant about giving money to small businesses.

But it is not necessarily smooth sailing for everyone else. Export-dependent industries and the automotive sector still find it difficult to get money, according to Volk. On the whole, though, talk of an imminent credit squeeze across the land is grossly exaggerated, even if banks remain hesitant lenders.

Loan demand low, may pick up in fall

One reason Germany has so far avoided the worst of the credit crunch is due to falling demand for loans, according to Manfred Jaeger, an expert on financial markets at the Institute of the German Economy in Cologne.

"If breweries produce less beer, and at the same time Germans get less thirsty, there is no problem," Jaeger said.

Uncertain prospects regarding demand for their products have forced many businesses to shelve plans for expansion and investments. If they do request extra capital, they only ask banks to help bankroll their daily operations. This is also reflected in KfW data. Most of the state bank's loans are primarily helping crisis stricken companies get back on their feet.

This may change in fall, Jaeger said. With the EU's announcement on Monday that Germany is now out of recession, businesses will soon rediscover their investment plans and need money for them.

"If banks remain unwilling to lend, we then have a problem," Jaeger said.

While he said a credit crunch is not inevitable, fear of one later in the year has grown real enough for politicians to act.

Two weeks ago, the government added what it calls a global loans facility to the Germany Fund. It consists of 10 billion euros earmarked for loans to banks which are expected to use it to pay out smaller loans to businesses. The global loans facility draws on the existing loans volume available in the fund.

Loan decisions too slow

If this measure succeeds in encouraging banks to be more generous in issuing loans, remains to be seen. Practical problems have played no small part in keeping businesses apprehensive about the Germany Fund as a whole, according to Torsten Schmidt, an expert on macroeconomics at the RWI Institute for Economic Research in Essen.

"It takes far too long to get applications authorized," he said. "Many companies think twice about turning to state aid."

When the scheme started it took several weeks or longer in each case to make a decision on requests for money, the KfW said in a statement. It now requires 13 days on average, but the goal is to respond to a request within 10 days of receiving it, the state bank said.

Schmidt and the IW's Jaeger agreed the Germany Fund is largely operating as intended. It is going to be vital, however, that the state disengages as soon as possible, Jaeger said.

Over the last year, German tax payers via the state have begun to run banks - such as property lender Hypo-Real-Estate - bailed out companies and ultimately are the underwriters of the Germany Fund, too.

The state's massive presence in the markets could turn into a liability in the medium term, Jaeger said.

"When businesses are ready to invest again, they need to be able to turn to lenders not burdened by political agendas," he said.

Author: Ranty Islam

Editor: Sean Sinico