On the Potsdamer Platz, which was once a wasteland between east and west Berlin, the contractors have made an inland sea. Cranes and barges shift earth for the foundations of the biggest development site in Europe. Men work below the dam, small and vulnerable as ants, separated from the wall of water by a few inches of steel.
For five years, much of east Germany has been a building site. At first the building stimulated a boom in consumption and construction, but it failed to spill over into productive sectors. Now the building continues grimly in the teeth of recession in the east and west. The industrial base in the east has collapsed; official unemployment is close to 20% (if you include job creation and early retirement it’s more like 40%). For the whole of the country, the average unemployment rate is 12%. In its present economic state, but lacking its eastern region, Germany would be trying to revitalize growth rather than screw down spending. That’s the view of Heiner Flassbeck, head of forecasting at Deutsches Institut für Wirtschaftsforschung (DIW) in Berlin.
But Bonn still deludes itself that absorbing the former German Democratic Republic (GDR) has meant no more than a slight course correction on the path to a united Europe. It is ignoring the figures and the everyday reality of joblessness and industrial collapse east of the river Elbe. Instead of the sum of between Dm15 billion ($10 billion) and Dm20 billion that forecasters once thought would be needed to turn the five eastern Länder around, transfers are likely to continue at close to Dm200 billion a year (25% of GDP) for the foreseeable future.
East Germany’s GDP growth, which began to lead west Germany out of recession in 1991 and 1992, has stumbled. The most optimistic growth figure for 1996 is 4% – from a pathetically low base.
“The government finds it difficult to accept that the catch-up in east Germany has come to an end,” Flassbeck says. He believes the entire European economy is doomed to uncompetitiveness and stagnation unless EU governments shake off their preoccupation with saving money. The stumbling block is their blind faith in the criteria for economic convergence enshrined in the 1992 Maastricht Treaty – that governments should strive towards a maximum budget deficit of 3% of GDP, a gross government debt of 60% of GDP, and stable inflation and exchange rates. “Only the German government can open the knot of the Maastricht criteria,” says Flassbeck.
Black hole
Although the entire German economy has problems, the transformation of its eastern Länder from communist state to market economy is a major drain on resources and morale. According to figures from the Federal Statistical Office, financial transfers from west to east totalled Dm132 billion in 1991, Dm156 billion in 1992 and Dm170 billion in 1993. By 1993 a quarter of that was unemployment benefit. Transfers are now running at about Dm200 billion a year.
But that doesn’t include the cost of privatizing east Germany’s commercial companies by means of the privatization agency, the Treuhandanstalt, or of upgrading facilities such as the post and railways. By the time the Treuhand was dissolved at the end of 1994, it had run up debts of Dm204.6 billion, of which all but Dm1.1 billion was issues of bonds, notes and Schuldscheine. That liability has now passed to the Inherited Debt Payment Fund (Erblastentilgungsfonds – ETF) the final resting place of all debt resulting from unification. The ETF has total debt of Dm321 billion, which includes Dm75 billion for continuing equalization payments to banks and foreign trade organizations. Servicing the ETF debt is costing about Dm30 billion a year.
Up to October last year, German development bank Kreditanstalt für Wiederaufbau (KfW) had lent Dm91 billion into east Germany. Another development bank, the Deutsche Ausgleichsbank, had lent Dm37 billion between 1990 and 1995.
There seems no way for Germany to avoid making enormous transfers for the foreseeable future. But there’s no assurance yet that the money isn’t vanishing into a black hole. The average east German has been taken care of physically; but spiritually, people see what’s left of their country as a wasteland dotted with expensive amenities. Said one east Berliner: “Where there used to be bookshops, admittedly with few books you’d want to read, there are now banks.”
Only extreme optimists continue to describe the course of the past five years as a success. As for the opinion of a former east German diplomat lucky enough to have found work recently: “I’d rather have become a Czech.”
What went wrong?
Some economists argue that the exchange rate chosen for currency union – Dm1 for two Ostmarks – was the killer. It effectively stoked huge consumption in the first two years and brought east German wage levels, although lower than west German ones, out of step with the productivity of most east German companies. It also, arguably, loaded companies and municipalities with excessive debt unrelated to the way they had previously borrowed money. Generous wage agreements with the unions, inspired by the initial construction boom, brought east German wages to within 20% or 30% of west German wages in five years and they are due for parity by 1998.
Flassbeck blames the privatization agency, the Treuhandanstalt: “There was no capital side in the wage negotiations. The economic institutes always told the Treuhand [which at that stage owned most of east German industry] ‘You have to engage in wage negotiations’. But the Treuhand always said: ‘This is a market. Market forces will bring it to the right result’.”
Suggestions for a reasonable exchange rate vary from 1:3 to 1:10. East German companies engaged in foreign trade worked on a rate of 1:4.4. Companies and municipalities importing goods and services in hard currency paid a penal rate of 1:8. With the currency union at 1:2, the liabilities for these goods and services went on to their opening Deutschmark balance sheets at four times face value.
Speed was the essence
Much of the company debt was wiped out when the Treuhand recapitalized companies for resale. But municipalities are still arguing about the level of their debt. One strong point they make is that they were used by the authorities in the GDR as a source of revenue which was scooped into central coffers, or used for national rather than regional projects; they had little control in a conventional sense over their assets and liabilities.
A currency union at multiple exchange rates might have been more sensitive. But speed was the essence of German reunification. A less generous exchange rate on the asset side would have risked causing political turmoil and a loss of skilled east German labour, as mass migration to the west continued. Even so, two million of east Germany’s brightest and best have moved to west Germany to seek their fortunes.
Few economists now criticize the Treuhand in principle for its summary privatization of 20,000 east German companies. It seems to have done as good a job as possible, bearing in mind the urgency, and the appalling commercial and environmental state of most industries. “We applied the four Ks – Konzept, Kompetenz, Kommitment and Kaufpreis, [purchasing price],” says Heinrich Hornef, former Treuhand board member and president of its successor, the Bundesanstalt für vereinigungsbedingte Sonderaufgaben (BvS).
Two or three cases have earned the Treuhand and the BvS bad publicity which is out of proportion to the overall achievement, say most of those involved. “It’s a fantastic performance,” says Peter Rohrer a director at Commerzbank in Berlin. “When you see your 18-year-old child going off into the world, you’re sure you could have brought him up better. But actually, I don’t believe we could have done it better.”
The BvS says it learned in January that part of Dm854 million in subsidies for two shipyards on the Baltic had apparently been used to shore up the financial difficulties of their west German buyer, Bremer Vulkan. “We feel we were deceived by the managing board of Bremer Vulkan, and we don’t know how much the auditor [Coopers & Lybrand] knew what was going on and how much was withheld from us,” said Hornef on March 8, “It was the job of [Bremer Vulkan’s] supervisory board to ask the questions.”
Cynics, however, see Bremer Vulkan as the tip of the iceberg: if the BvS/Treuhand can’t keep track of how Dm854 million of its money is spent, how much more has it let slip through its fingers?
The privatization process consisted mostly of agreeing to wipe out a company’s debts, in return for a business concept including a commitment to invest new money and safeguard some jobs. Valuing the companies was extremely difficult. As Treuhand gained experience it became cannier about extracting asset values. But the rumour mill suggests that it let some prizes go too cheaply. One was a shipyard in Rostock, bought by Kværner of Norway “which got a subsidy of Dm500 million for investing Dm1”, says one critic. Another was Jenoptik in Jena, the successor of the famous Carl Zeiss, now run by the former prime minister of Baden-Württemberg, Lothar Späth, and owned by the Land of Thüringen.
“The only constraint the Treuhand had was a negative one: to lose only Dm30 billion,” says Flassbeck. “It was clear the Treuhand would always use up the whole deficit. This is something the government got wrong.”
Value in doubt
The suspicion remains that the Treuhand didn’t get full value for the east German assets it sold. There were also the credit assets taken over from east German institutions by west German banks, and the insurance assets taken over by Allianz Versicherung in 1990 before the Treuhand was born, at prices never fully disclosed.
Deutsche Bank, Dresdner Bank and the Deutsche Handelsbank, Berlin (now part of the Crédit Lyonnais group), and other German banks, are still negotiating with the banking supervisory office (Bundesaufsichtsamt für das Kreditwesen – BAK) about the exact value of the assets they took over when monetary union took place on July 1 1990. Deutsche and Dresdner took over 65% and 35%, respectively, of the Deutsche Kreditbank, including loans that it had made to east German companies.
Where those loans were bad or doubtful, Deutsche and Dresdner, and other inheritors of corporate claims, were able to replace them with guaranteed notes (Ausgleichsforderungen – see box, page 51) from an equalization fund (Ausgleichsfonds Währungsumstellung) paying three-month Fibor (the Frankfurt interbank offered rate). “There was always a temptation for any bank to make the gap [between loans and their performance] as big as possible,” says a Bundesbank source.
The banks argue that after the companies fixed their opening balance sheets at July 1 1990, everything thereafter was banking risk. It may be easy after the event to say the assets were undervalued, but at the time no-one had better price information. “For the first half of that year [from July 1990], Deutsche and Dresdner were virtually running the business of the Treuhand,” says Wolfgang von Eckartsberg a director at Deutsche Bank in Berlin. “The Treuhand never paid us for this consultancy – our activity in the first year was for much more than money.”
In March 1990 at the Leipzig spring fair, Carl Hahn, then chairman of Volkswagen (VW), protested that east Germany was “not a private hunting-ground for the Federal Republic”. But for the first two years after unification it seemed that way.
Big German industry moved in, picked the prime sites in Berlin, and the likely plums of east German enterprise. Moreover, many industries had their own staff seconded to the Treuhand – not so much insider-dealing as dealers on the inside. Potential foreign investors were daunted by the uncertainty of ownership, environmental liability, even the language barrier. “For the first two years Hahn was wrong,” says Horst Ahrens director at Commerzbank in Leipzig. But then foreign investors began to show they had more staying power than the Germans, he says.
After German companies had advised closing down Saxony’s environmentally un-friendly, open-cast, lignite mining works, Mitteldeutsche Braunkohle, a US-British consortium led by Morrison-Knudsen came in with an investment concept. Investors in the few surviving industries in the region include Dow Chemical, Elf Aquitaine, Enso-Gutzeit, and Air Liquide.
Hahn recalls his 1990 remark, but insists that General Motors came in as an investor from the start. But it wasn’t long before west German industry, including VW, was looking at bigger markets and cheaper labour beyond the east German border.
Collapse of industry
West German companies were reluctant to create internal competition. The ideal was to buy something in east Germany that simply expanded their markets and production line without their “eating their lunch” – the so-called verlängerte Werkbank (extended workbench). But the upshot was west German commuter management, minimal local employment, and corporate tax paid to the Land back at headquarters.
In the meantime, there was an almost total collapse of unwanted and inefficient industry. The former eastern bloc markets imploded; quality and productivity were too low to compete in western markets; and wage agreements were too high to sustain.
By contrast, there was a speculative boom in real estate. It began in 1991 and reached a peak at the end of 1992, but continued long enough to adorn the big cities with swathes of empty offices and condominiums, whose rents haven’t yet fallen far enough to meet the almost non-existent demand. The boom was fuelled by the consumption bubble immediately after unification (deprived east Germans playing material catch-up). German real-estate investors could claim a tax-break until the end of 1996, equivalent to half of the investment they had made in construction or refurbishment in the east.
There had been expectations of an economic miracle (Wirtschaftswunder) like that experienced by West Germany after World War II; but they were short-lived. It was simply a feeding frenzy. East German construction companies flourished for a while, but later many died. The watershed was the spectacular bankruptcy in 1994 of Frankfurt property king Jürgen Schneider, which had repercussions in the east. Property credit, which had been getting tighter, was totally squeezed, and now Maculan Holding of Austria, which had over-extended itself in the east German construction sector, is facing bankruptcy. The surviving east German builders, practically the only class of medium-sized firm (Mittelstand), are now being undercut by west German rivals, just as the grace period ends on their start-up credits from KfW. The west German firms are better capitalized, better managed, have probably written off the costs of their equipment already, and can employ cheap labour from the UK and elsewhere in Europe.
There was a political attempt to shore up private sector investment by persuading the German banks to put Dm1 billion of equity capital into Treuhand companies. The private banks’ vehicle for this, the Beteiligungsgesellschaft Neuer Länder (BNL) with funds of Dm400 million, has so far invested in 13 former Treuhand companies. But, with many shareholders (members of the private banks’ association) pulling in different directions, the exercise is acknowledged to have had very
little impact.
The Treuhand, from its expenditure of Dm200 billion, managed to claw back only Dm37 billion in cash sales, although it measured its success rather more in the commitments by buyers to invest a further Dm211 billion – commitments are one thing, keeping them is another. The Treuhand spun off some companies, that were regarded as being in need of restructuring before sale, into five holding companies – Management Kommanditgesellschaften (MKGs). The first MKG was due to have disposed of itself by the end of March. But grouping these companies didn’t help them stand on their own feet.
The lack of a Mittelstand in east Germany is its biggest problem. Germany’s Mittelstand was the backbone of the post-war economic miracle, but 40 years of communism took care of any such talents in the east.Mittelstand firms have a more stabilizing effect locally than multinationals, which tend to relocate when they see an advantage. But medium-size firms won’t grow in east Germany without better access to venture capital and other forms of equity. Other east European countries have addressed this problem with voucher privatizations, investment funds, and stock markets. Voucher privatization was rejected for east Germany, because west Germans would have wanted vouchers too.
Cultural desert
Germany lacks an equity culture, despite efforts to develop the Deutsche Börse and its regional stock exchanges. Only two east German companies have been listed: Sachsenmilch (dairy products) and Sero Entsorgung (waste recycling). Sachsenmilch, led by Deutsche Bank in 1991, was a disaster because of mismanagement and alleged fraud over the costs of a huge dairy facility near Dresden. Landesbank Sachsen Sero led a Dm3 million share issue for Sero last year.
Von Eckartsberg was seconded to Deutsche Bank Berlin in 1990 because of his capital markets expertise. “I was supposed to establish capital markets business in this region,” he says. “If we apply normal [listing] rules it’s a way off. But with penny shares it could happen in the next couple of years.” Equity brokers aren’t holding their breath. A more realistic project could be privatizing some of the companies owned by Berlin: water, gas and waste disposal. “These could be brought to the market,” says von Eckartsberg.
The record of venture capital is nearly as bad as share offerings. Only about Dm750 million in venture capital had flowed into east Germany by the end of 1995. Hans Damisch, chairman of the German Venture Capital Association (BVK), says that only Dm350 million of the Dm641 million invested in east Germany by his members to the end of 1995, was risk capital; the rest was subsidized. Most German banks have small funds to back growing firms and innovation, but their results so far vary from puny to negligible. “We’ve asked the government to lift capital gains tax and introduce other deregulatory measures for venture capital,” says Damisch. In February the finance ministry in Bonn for the first time looked seriously at the venture capital route.
Foreign emerging market funds, which might have flocked to east Germany because of the currency stability, have stayed away. The one listed fund aimed at the territory, the East German Investment Trust (Egit), has been dogged by ill-fortune. From March 1993, when its shareholders’ funds were valued at Dm157 million, it lost Dm45.5 million in asset value in the following two years, according to its 1994-95 annual report. In general it had mixed results with its portfolio of 17 investments in real estate, construction materials, paper processing and service industries. But its biggest losses came from the failure of whitegoods manufacturer Foron to market some quite sophisticated products, and from the liquidation of Dresdner Beton, a producer of reinforced concrete elements.
Egit’s annual report complains in both cases of the Treuhand’s failure to honour commitments. Egit sympathizers note two flaws in the Egit approach. First, they say the trust should have taken majority stakes in these companies, so that it could control and change management quickly. Second, they suspect that Egit managers fell foul of personalities in the Treuhand successor, the BvS. “If you’re dealing with a middle manager in the BvS and he doesn’t like you, you’re in big trouble. There are so many small things he can do to obstruct,” says one investor. “The very best are gone from the Treuhand.”
But from Foron’s viewpoint, neither of its big shareholders, Egit and Berliner Bank subsidiary BKK Kapital-Management, has been prepared to invest more money. Egit says the BvS hasn’t made promised payments. Attempts to sell Foron to Samsung or Turkey’s Koc group, have failed.
The Egit story is “a disaster for the capital market”, says Michael Haarmann at Deutsche Handelsbank, Berlin, which started divesting its Egit stake two years ago. “The portfolio was essentially good, but there was a management problem on both sides,” Haarmann says.
Advent International of Boston has done better financially, but has also been frustrated on a playing field that was hardly level. With $4 billion of assets under management worldwide, it has made four investments in east Germany, a commitment of about Dm600 million in capital expenditure over five years. Its plan is to add value then resell its assets. It has already sold one investment, a brickworks, to an Australian buyer. It owns a cable television company, and a glassworks in Thüringen.
Advent’s most spectacular purchase was rolling-stock maker Deutsche Waggonbau (DWA), Berlin, an investment of about Dm250 million. “DWA has found a good haven in the Advent group,” says Hornef of the BvS. Advent’s philosophy is to buy a controlling interest – it has 100% of DWA – and in many cases to plan a stock offering after a few years.
Despite its popularity with the BvS, Advent has been messed around by Germany’s old-boy network. The liquidator of Docter Optic, a maker of fine optical lenses in Wetzlar, awarded the company to Advent on February 19. That was after Advent had twice appealed against the liquidator’s acceptance of a lower bid elsewhere. But in March the contract was snatched away and awarded to a German consortium, led by Rodenstock of Munich, backed by the German auto industry, and BHF-Bank. BHF represented other banks in the creditors’ committee and was an equity participant in the Rodenstock syndicate.
“Closing ranks like this isn’t peculiar to Germany,” says an investor familiar with the case. “Sometimes you have to decide not to fight it. Advent could have saved themselves management time by pulling out sooner.” The same is probably true of Advent’s attempts last year to buy Mansfelder Kupfer, which finally went to a Belgian buyer.
Advent doesn’t have a quota for east Germany. Its investments there are targets of its fully invested European Special Situations Fund, and of its Global Private Equity Fund. So, if its efforts at new investment continue to be frustrated, the single large-scale, foreign financial investor in east Germany might simply look elsewhere.
Rays of hope
Where are the lights shining in east Germany’s bleak economic landscape? One obvious point is the city of Leipzig, which even in GDR times had an international flavour, because of its bi-annual fair. More than any other city, Leipzig seized opportunities as soon as the Berlin Wall was breached. While other sites were encumbered with restitution claims, it bought up much of the inner city and an airfield to the north that is now the location of the new fairground, to be opened on April 12, and of Quelle’s Dm1 billion mail-order facility. It set up enterprise “incubators” in offices owned by the city, the only such scheme in east Germany.
Leipzig deliberately encouraged real-estate development, even though it suspected the sector was oversold. “The overhang was predictable,” says Michael Schimansky, acting director of Leipzig’s Office for Economic Promotion, “but we didn’t foresee the dimensions of it. However, what would you rather have, crumbling ruins or nice buildings at very reasonable rents?” And these are just the projects that were completed; hundreds more weren’t implemented, says Schimansky.
Michael Weiss, chairman of Landesbank Sachsen (Sachsen LB) in Leipzig, refers to this as the Schweinegalopp (kangaroo hop) of development: “It was done deliberately, it was part of our policy to employ people in construction. Of course we had hoped for more private investment, but we put something in instead.” By establishing attractive infrastructure, Leipzig hopes to help investment decisions, says Schimansky. Direct subsidy, as it is done by some cities, is officially against EC regulations.
One Leipzig building site sports the graffito: “Shed no tears for Dresden.” In 1990 Dresden won the battle with Leipzig to be capital of the Land of Saxony, but it is losing the war to be its economic centre. “Leipzig was always the marketplace and Dresden was the Residenz,” says a proud Leipziger. Despite its beautiful baroque buildings, mostly restored since the city was flattened in World War II, Dresden has no attractive centre and little civic pride; an underlying reason, believe Leipzigers, is that their city received West German television and VHF stations through the 1970s and 1980s, while reception was impossible in Dresden. Dresdners see Leipzig as little more than a soulless shopping centre.
But Dresden has the same speculative brood of empty offices and condominiums. Siemens has built its Microelectronics Center on the site of the old Russian barracks on the outskirts of town, which will employ 1,500; but at the same time it has closed the old Robotron computer works in the city centre, with the loss of 2,500 jobs.
The big problem in Dresden, Leipzig and the rest of east Germany, is the lack of businesses in the Dm20 million to Dm100 million turnover range. Compared with the number of employees in industry in 1989, now in Leipzig there is only a tenth of that total.
The best hope is that there are now some small beginnings. Last year there were 170,000 business start-ups and 130,000 business closures in the east – at least a net gain. “We finance many more start-ups than we ever dreamed of doing in the west,” says Horst Klein director at Dresdner Bank in Dresden. “The ones who survive will be able to do business anywhere.”
The dream of some people in the east is that the region will become the first deindustrialized area of Germany, with a superb infrastructure, where small and medium-sized hi-tech and service companies flourish. “The focus of wealth has always been on the move in Germany,” says Rohrer at Commerzbank, “from the Ruhr, to the south, then to Hamburg; perhaps it will move next to the eastern Länder.”
But even the most bullish don’t see that becoming a reality for at least a decade. “How long will it take to put in the capital stock?” asks Weiss at Sachsen LB. ” Perhaps 10 years, 15 years? I don’t know.” He also notes that, beyond real estate, the investments will be “very capital-intensive, offering not much employment – a disadvantage”.
In the meantime the German taxpayer goes on paying, and the drag on Europe’s exit from recession continues.
Water under the bridge
German banks are still wrangling with the authorities about their 1994 balance sheets, and the wrangling is likely to go on till 1999, according to an exhausted official at the banking supervisory office, the Bundesaufsichtsamt für das Kreditwesen (BAK) in Berlin.
At issue is the amount of risk-free assets the banks claimed from the government to offset the impossible-to-value loans they took over from east German entities on July 1 1990.
As the value – or generally the disastrous lack of value – in those loans became clear, the banks were able to claim risk-free assets, Ausgleichsforderungen (equalization claims), from an equalization fund which pays three-month Fibor (Frankfurt interbank offered rate) with a maturity of 45 years.
The equalization fund also made up the shortfall between assets and liabilities created because some depositors’ savings were exchanged at Dm1 to one Ostmark, while all other assets and liabilities were exchanged at Dm1 to two Ostmarks. The level of Ausgleichsforderungen claimed by the banks stood at Dm54 billion on July 1 1990, but rose to Dm84 billion by December 1992, before settling to around Dm70 billion by the end of last year.
The BAK is re-examining the banks’ 1994 balance sheets and the profit and loss on these loans, compared with the companies’ opening balances at July 1 1990. The banks are understandably reluctant to make changes. A revision of the 1994 balance sheet would require a new audit, new approval by the supervisory board and a possible revision of the dividend already paid.
Last September the Federal Accounting Office (Bundesrechnungshof – BRH) produced a confidential report which, according to the Frankfurter Allgemeine Zeitung (faz) and other German newspapers, accuses the government of paying too much on the work-out of the old loans in east Germany, and of selling too cheaply to west German counterparts the banking business of the five east German banks.
Moreover, in most cases there was no mechanism to claw back funds as the valuation of the business became clearer, the report argues. The BRH won’t comment, apart from confirming that a report exists. According to the faz, the report says that DG Bank assumed 15.5 billion Ostmarks of assets from the Genossenschaftsbank Berlin, and that Berliner Bank assumed 11.5 billion Ostmarks of assets from the Berliner Stadtbank. The purchase price didn’t take account of the fact that these assets were collateralized with government Ausgleichsforderungen. The banks were paid too much to assume the loans and they also benefitted from the hike in interest rates to market levels.
It would have been cheaper to assign the assets to the former State Bank of the German Democratic Republic which had been absorbed by the government. Instead, the west German banks assumed the loans and wrote them off, claiming Ausgleichsforderungen totalling Dm98 billion. The BRH reportedly says it doubts whether the banks had enough incentive to pursue payments from the debtors when they could fall back on risk-free Libor assets from the state. One German parliamentarian estimates the understatement of these assets cost the state an extra Dm20 billion.
The BRH also apparently faults the finance ministry for not preventing the banks from receiving double interest payments of several billion Deutschmarks from the old loans. This was possible because the privatization agency, the Treuhandanstalt, was obliged to pay interest on loans to the companies in its charge, according to the unification law. Since the banks had already written off the loans, they also received interest payments on the Ausgleichsforderungen from the government’s credit work-out fund (Kreditabwicklungsfonds).
The faz account says that according to the finance ministry, double-interest payments to the Deutsche Kreditbank, the Deutsche Aussenhandelsbank and the Deutsche Genossenschaftsbank totalling Dm4.2 billion were wrongly accounted for.
The west German banks are understandably reluctant to rake over the past. They believe they did a good job, pumping liquidity into the east German economy at a critical time and enabling a huge logistical exercise. But the inherited debt payment fund, the Erblastentilgungsfonds, which has now assumed all the Treuhand’s liabilities and all those connected with the Ausgleichsforderungen, is anxious to reduce its burden. The bank supervisor, the BAK, is charged with reconciling bank claims on Ausgleichsforderungen at the currency conversion date of July 1 1990, and the claims on their balance sheets on December 31 1994.
The Dm Balance Sheet Law of 1990 allowed all companies and banks to correct balance sheets retrospectively up to the end of 1994. “The big banks almost doubled their Ausgleichsforderungen in the last five years,” says a BAK source. “In other cases, where the Treuhand took over liabilities of company, they have significantly reduced. And property that was encumbered has passed to the banks.”
In some cases the BAK has actually raised a bank’s level of Ausgleichsforderungen. “This is because the banks have booked the social costs of reducing personnel into their current account instead of the capital account,” the source says. “But in general we’re concerned with the level of claims being too high, not too low.”
As the banks experienced it, says one banker: “The readiness of the BAK and the auditors to recognize the Ausgleichsforderungen diminished significantly in 1993 and 1994.”
The justice ministry official who designed the law, Herbert Biener, believes the system of Ausgleichsforderungen may have been costly “but it was necessary. Otherwise the risk of banks losing their capital would have been too high”.
But the banks question the bean-counting attitude of the Bundesrechnungshof. “Ask the BRH who else there was to buy the [east German] banks at the time,” says Wolfgang von Eckartsberg, a director at Deutsche Bank.
And a banker in Dresden comes out fighting: “The BRH are a bunch of civil servants. What on earth would have happened if they had been around in 1991 and 1992?”
– DS
Real-estate roller-coaster
Franz von Kunowski used to trade derivatives at Deutsche Bank in Frankfurt. Now he has a real estate company in Dresden.
He was so taken with the eastern way of life that he bought two Trabbis (the Trabant car that east Germans used to buy for 13,000 Ostmarks after being on a waiting list for 13 to 15 years).
The first, a two-cylinder beauty in perfect working order, cost him Dm80. The second, a four-cylinder version built after unification, was a little more expensive, and it scared the hell out of him – the engine was too powerful for the brakes and the chassis. He’s has now got rid of both vehicles.
Kunowski prefers an Opel as a less conspicuous runabout. He has eight apartment buildings dotted around Dresden. When he spots a bargain he buys another piece of real estate. He’s been amused to find prices coming down to the level he was prepared to pay some months ago.
His strategy, he says, is to refurbish the houses, but only to a standard the tenants can pay for – east Germans aren’t used to paying high rents and many have had to lower their sights since the first flush of consumerism in 1990-91 when their savings were converted to Deutschmarks.
High-cost condominiums whose rents rocketed to Dm25 a square metre and are now back to Dm20, stand empty, while Kunowski’s modest town houses are stuffed with tenants. Office rents also peaked at around Dm30 a square metre but now “even at Dm11 a square metre there’s sometimes no demand”, Kunowski says. He knows the market is bad because the banks have recently been calling to lend him, Kunowski, money. That never happened when he most needed it.
As we take the Grossenhainer Strasse towards Schloss Moritzburg we see the terrible effect of Dresden’s property bubble. First a Dm500 million development on 90 hectares of land reclaimed and then resold by the Krumm family, which retains its fine family house. The bulldozers are working round the clock, throwing up more shops and offices where there is already a glut.
We pass the green-painted Jugendstil building of Jehmlich, Dresden’s famous organ-builder, still just alive. Beside these relics are signboards advertising projects for office buildings and condominiums – but those which are built stand empty, others will never be built.
On one desolate site is the sign EVDR Bahn Consult, and the picture of a fine architect’s drawing “to be ready by the end of 1995”. Not a single brick has been laid, and it’s already March 1996.
Here is a nearly completed condominium – Wohn-Park August der Starke. The developer hasn’t let any of it but is planning to start another condo on the other side of the road. Beyond it, an old malt warehouse turned into a shopping mall. “This is a low-income area,” says Kunowski.
One of his 19th-century apartment buildings stands nearby, or rather half of it; the other half, encumbered by ownership litigation, is boarded up and crumbling. “It’s gone too far to buy and restore,” he says. Next, the toy factory, which is idle; plans to develop the site have come to nothing.
The big developers in Dresden are Grundinvest, run by the son of a former Deutsche Bank board member, and the noble estate of Thurn & Taxis. The construction boom was fuelled by the Fördergebietgesetz (the law for areas of special development) which allowed German investors to write off 50% of their additional investment beyond the purchase price.
At the peak, condos were selling for Dm5,500 a square metre, now the price is back to between Dm3,000 and Dm3,500. “This was providing jobs, but it was sponsoring private consumption, not factories,” says Kunowski.
His friend Metzner, who grew big on the boom, is a victim of that squeeze. He’s a builder whose workforce expanded to 50 people, and for an east German manager he did well. He’d had 10 years’ experience before 1989, moonlighting by building private houses, a second profession smiled on by the authorities.
In 1992-93 he turned over enough work to buy a large town house. The bank loved his cashflow and his business plan. But then business got tougher and contracts with clients grew thicker. “In the old days,” says Metzner, “your word was your bond.”
Today Metzner is careful to turn down the biggest jobs and diversify his risks, by working for five or six smaller clients and never being a subcontractor (a sure way not to get paid). In 1995 the bank got tough and came to inspect his house as collateral. “They’d never done that before,” he says, “I’ve a good mind to change banks. I’m not satisfied with their service. Every time I go there I see a different person.” This happens to be Dresdner Bank.
But Horst Ahrens at Commerzbank in Leipzig has little sympathy for people like Metzner and every sympathy for Dresdner Bank. “These people are under-capitalized. They’re trying to run a Dm3 million turnover business on Dm50,000 of capital. When they should have been building up reserves they were probably taking out another loan to build themselves a nice private house. We were lenient on them in the good times, but now it’s ‘business as usual’ like it is in west Germany.”
Getting started on the real-estate trail, without capital, is a test of ingenuity. Mario, a former officer in the East German Nationale Volksarmee, based in the Baltic port of Rostock, took redundancy in 1990 and joined the branch of a west German computer firm as a salesman. After two years he quit, having saved enough with his friend Karsten to buy a five-storey house in downtown Rostock. Living in low-rent apartments and drawing unemployment benefit, the two friends and their wives worked day and night for a year-and-a-half converting the house into six apartments. They saw the value of the house decline as real estate prices plummeted and they feared they would have to sell to cut their losses.
“The worst thing that could have happened to us,” says Mario, “would have been that the labour office put us on to a job-creation scheme, to sweep the streets or something.” By March, five of the apartments were ready and occupied by tenants. “So much blood, sweat and tears went into this house we decided not to sell,” says Mario’s wife Antje, a “recession-proof” assistant pharmacist. The rents are now covering the cost of the bank loan and the building is paying for itself.
The sixth apartment, on the ground floor, is Mario and Karsten’s real-estate bureau. They’re on the way to their first Dm1 million. – DS
