Financial Times, 31.08.2007
COMPANIES INTERNATIONAL: Takeover strips shine from star state
The banking crisis this month in Saxony, south-eastern Germany, has hit the region's standing as one of the country's most dynamic economies, business representatives, politicians and analysts told the Financial Times yesterday.
Sachsen LB, Saxony's troubled publicly owned bank, was this week bought by LBBW (Landesbank Baden-Württemberg), the larger Stuttgart-based public Landesbank, for at least €300m ($409m), after Sachsen LB was unable to handle its exposure to volatile credit markets.
A political crisis resulting from the takeover intensified yesterday, as Saxony's opposition parties said they would use an emergency session of the regional parliament in Dresden today to force the regional government to provide unpublished financial details on why the deal was necessary. Failure to do so would spark a constitutional complaint that would in turn throw the takeover into doubt, the opposition said.
Hundreds of international companies have invested in Saxony since German unity in 1990, including electronics giants AMD, Infineon and Hitachi, carmakers Porsche, Volkswagen and BMW, and internet retailer Amazon, making the state the star performer in the otherwise troubled former communist region.
The state's economy grew by 4.1 per cent last year, compared with German-wide growth of 2.7 per cent.
Yet according to Wolfram Schnelle, deputy director of the IHK chamber of commerce in Dresden, Saxony's state capital, the "management mistakes" at Sachsen LB - coming after earlier scandals at the bank - have undermined the international reputation of Saxony's regional government.
"I'm afraid that if I were in the shoes of a potential foreign investor, this evidence that Saxony is an unreliable partner could effect my investment decision," says Mr Schnelle, whose chamber represents 90,000 companies in the region. Mr Schnelle agrees with suggestions that LBBW may steer investors towards Baden-Württemberg rather than Saxony.
Before the takeover, Sachsen LB was owned jointly by the regional government and savings banks and local authorities in Saxony. The bank's state-appointed top managers, its supervisory board - also staffed with political appointees - and Saxony's finance ministry all ignored repeated warning signals that the bank's speculative investments through its Ireland-based subsidiary were too risky, banking experts say.
Karl Nolle, economics spokesman for the Social Democrats, junior partner in Saxony's Christian Democrat-led government, says the bank behaved "like in a poker game - and such behaviour will certainly impact on our regional economy".
Most immediately, local authorities that had come to rely on Sachsen LB dividend pay-outs would in future lose "an estimated €40m-€50m annually" in revenues for social projects, André Hahn, leader of the opposition Left party told the FT.
The LBBW takeover of Sachsen LB marks the demise of east Germany's only Landesbank, and the abrupt end to a vision among Saxony's post-unity political fathers to build an independent financial institution in the east.
The crisis is a cruel blow for Georg Milbradt, Saxony's premier, who helped set up the bank in 1992 when he was the state's finance minister. "The bank was his baby. He's very emotional about it," a close political ally told the FT. A former professor of finance from west Germany, Mr Milbradt had now "completely undermined" his reputation in Germany and beyond as a clever economically minded politician, Mr Nolle said.
Mr Milbradt, who refused an FT interview request, told a press conference this week that the LBBW take-over of Sachsen LB was "good for Saxony" - a claim derided by SPD and opposition politicians and local business leaders.
In contrast, Silicon Saxony, an alliance of large electronics companies in Saxony, played down the likely impact of the bank crisis. Wolfgang Schmid, chair of the alliance and managing director of Qimonda, an electronics company with 3,000 staff in Saxony, said LBBW "comes from one of Germany's strongest regions and evidently sees economic opportunities in Saxony".
Joachim Ragnitz, east Germany expert at the Ifo economics institute in Dresden, was sceptical.
The western German Landesbanken with eastern operations "have not been especially interested in supporting the eastern German economy", he says.
