Via Financial Times

These are stressful times for Meinolf Brauer, chief executive of Walter Services, as he waits for an €8m loan he requested two weeks ago to ensure he can keep paying the 2,000 employees at his German call centre business.

“I have not received a single dime, I have had no feedback — positive or negative,” Mr Brauer says. He fears the company’s nine sites may have to close and shift to home working because of the coronavirus pandemic.

There are tens of thousands of companies like Walter Services rushing to access the largest government-backed rescue loan scheme ever launched in Europe.

In what finance minister Olaf Scholz described as a “bazooka” — a government-guaranteed liquidity scheme with no upper limit — any companies that were in a sound position by the end of 2019 have from Monday been able to apply for as much as €1bn in emergency aid, depending on their size and creditworthiness.

Such has been the demand for the scheme, in which the German government shoulders up to 90 per cent of the credit risk and the loans carry an interest rate as low as 1 per cent, local savings banks have been forced to recall retired employees to help. It is among the most generous of many such measures being launched across Europe and has caused Germany to abandon its longstanding commitment to balanced budgets

The UK has a similar, £330bn scheme to offer small businesses up to £5m each in emergency funding, but many midsized groups have complained they are not eligible. France has earmarked €300bn in guarantees for new loans to companies, but unlike Germany, it has yet to lift the cap. Italy is offering €350bn of such guarantees, while Spain has announced €100bn.

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Mario Draghi, former head of the European Central Bank, summed up the crucial importance of these state lending programmes, writing in the Financial Times last week: “The challenge we face is how to act with sufficient strength and speed to prevent the recession from morphing into a prolonged depression, made deeper by a plethora of defaults leaving irreversible damage.”

Small and medium-sized companies form the backbone of the German economy, employing 70 per cent of German workers and providing nine out of 10 apprentices. The pandemic and resulting lockdown of German society has left many unable to operate or without revenue. Should they start collapsing, it would cause lasting damage in a country already expected to suffer its deepest recession in over a decade.

“Never before have we managed to launch a programme as quickly as this one,” says Günther Bräunig, chief executive of the state-backed KfW bank, which is delivering the emergency lending to the German corporate sector.

Established in 1948 to administer Marshall Plan funds, it does not lend directly to corporate clients. Instead, KfW relies on local banks or branches to handle the relationship with the end customer.

So far, companies have applied for over €7bn in emergency loans, according to official data. As many as 100,000 applications are expected. But already, the strain on the system is becoming apparent. Almost 90 per cent of the country’s 300,000 retailers who have had to close their shops are counting on government aid, according to a survey by the German Association of Retailers. 

“Bank staff at key lenders all across Germany are currently working flat out,” says Martin Reitz, head of the investment bank Rothschild in Germany. 

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With payday looming on March 30, some companies are struggling to secure the cash needed to compensate their staff.

“The biggest worry we have right now is if any call centre will be closed,” says Mr Brauer. His bank told him the €8m rescue loan will not arrive until next week at the earliest and Walter Services may stand a better chance of receiving help if he asks for less. “If my agents cannot answer the telephone, I generate zero revenue. Wipe out.”

Even companies making vital medical supplies have had teething problems. InMaTec, a Bavarian company which manufactures medical oxygen generators, said it could not ramp up production as quickly as it would like, due to the upfront costs of up to €300,000 per industrial unit.

“KfW promised they have billions and billions, but it’s not coming to middle-sized companies,” says InMaTec’s chief executive Guido Kuschmierz.

Small hotels, local restaurants and retailers often sit on little if any cash reserves and have lost the bulk of their revenue, but still have continuing costs. These companies are often “in a state of emergency”, says Stefan Bender, head of Deutsche Bank’s corporate bank in Germany. 

The first Deutsche Bank client to apply for an emergency loan was a bakery in Mecklenburg-Western Pomerania which needed €110,000 to pay its bills. “We filed the application on Monday morning and received the approval within a few minutes at 8:20am,” says Marcus Thiel, a Deutsche Bank relationship manager, adding the cash was made available to the client some 24 hours later. “So far, the system is working amazingly well,” he says. 

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However, the capping of the state guarantee at 90 per cent of the credit risk could turn into a problem as banks may shy away from taking on any risk given the massive uncertainty. Hence the Association of German Chambers of Industry and Commerce is calling on Berlin to guarantee 100 per cent of all loans. 

While the system is largely working well for loans of up to €3m to small and medium-sized firms, “the situation for large companies is more mixed”, says Rainer Kirchdörfer, member of the executive board of the Stiftung Familienunternehmen.

“KfW continues to be responsible for reviewing the granting of larger loans and the documents to be submitted are manifold,” he says. “This considerably lengthens the procedure, we are talking about weeks.” The German Association of Retailers is also calling for non-refundable payments to larger retailers that are struggling. 

“We really need to be able to act in a non-bureaucratic way, and I did not get the impression that this was fully understood early on,” says Fred Schweikert, head of corporate clients at Volksbank Odenwald, a co-operative bank in a rural area south of Frankfurt.

Mr Schweikert adds he is optimistic the emergency lending will ultimately mitigate the current crisis, but not without claiming some victims first. “We need to be aware that not every single client of ours will survive,” he warns. “Some of the weaker ones will surely go under.”