Sunday August 30, 10:20 AM

Germany eyes steps to fight credit crunch - document

BERLIN (Reuters) - Germany is considering offering banks 10 billion euros in state-backed loans to prevent a credit crunch from throttling a nascent economic recovery, according to an Economy Ministry proposal seen by Reuters.

The proposal, entitled "Options for limiting a possible credit crunch", lists three steps for preventing tighter credit conditions from hurting German companies and the broader economy.

The plan was confirmed by Economy Minister Karl-Theodor zu Guttenberg on Saturday, who told reporters in Berlin: "There is a fear that the supply of credit could worsen, particularly for small and medium-sized businesses."

In a first step, the government would make 10 billion euros from a fund set up for crisis-hit companies available to state bank KfW for lending directly to banks, according to the paper.

A second step would be to strengthen credit insurers by providing state guarantees for their bad debt risk in the amount of 7.5 billion euros.

A third measure foresees KfW buying up export credits in a bid to improve the refinancing options of banks that provide export finance.

On Friday, the Bundesbank said it saw no evidence of a looming corporate credit crunch in Germany and the Munich-based Ifo economic think tank reported a decline in the number of firms experiencing restrictive lending conditions.

But German government officials have repeatedly expressed concern that banks may become more restrictive with their lending over the coming months.

In particular, they fear that Germany's "Mittelstand" small and medium sized businesses, the backbone of the economy, may have trouble getting access to credit, creating a damaging spiral.

In the document, the Economy Ministry expressed the fear that weakened balance sheets could lead to downgrades in corporate credit ratings from the fourth quarter of 2009, causing banks to rein in lending further.

German Finance Minister Peer Steinbrueck is hosting a meeting with lenders on Tuesday to discuss the matter.