Rejection is an ubiquitous mental defense mechanism. It involves the repression of bad news, unpleasant information, and anxiety-inducing experiences Judging by the German press, the nation is in a state of denial concerning the subsiding health of its economy and the diminishing fortunes of its financial system.

Commerzbank, Germany's 4th largest lender, saw its shares decimated by more than 80 percent to a 19-year low, having increased its loan-loss arrangements to cover flood-submerged east German financial obligations. Confronted with a sheer drop in net profit, it reacted reflexively by sacking yet more staff. The shares of many other German banks trade listed below book worth.

Dresdner Bank - Germany's 3rd largest private establishment - already cut an extraordinary one fifth of its workforce this year alone. Other leading German banks - such as Deutsche Bank and Hypovereinsbank - turned to stress selling of equity portfolios, real-estate, non-core activities, and securitized properties to restore their ailing earnings statements. Deutsche Bank, for instance, unloaded its US leasing and custody services.

On September 19, Moody's changed its outlook for Germany's biggest banks from "stable" to "negative". In a scathing remark, it said:

" The rating agency stated numerous times currently that current challenging financial conditions that are harming the banking business in Germany come on top of the tradition of previous techniques that were less focused on strengthening the banks' repeating making power. Certainly, the German private-sector banks, as a group, stay amongst the lowest-performing large European banks."

Recently, Fitch Ratings, the global company, did the same and reduced the long-term, brief- term, and specific ratings of Dresdner Bank and of Bayerische Hypo- und Vereinsbank (HVB).

These were just the last in a series of unfavorable outlooks relating to German insurance companies and banks. It is paradoxical that Fitch cited the "bear equity markets (that) have taken their toll not just on trading outcomes however likewise on sales to personal clients, the fund management company and on business financing."

Germans used to be immune to the stock market and its lures up until they were caught in the frenzied worldwide equities bubble. Moody's observes wryly that "a product and steady retail franchise in its home market, even if more modestly profitable, can and does represent a trustworthy line of defence against short-term problems in financial and wholesale markets."

The technology-laden and scandal-ridden Neuer Markt - Europe's response to America's NASDAQ - along with the SMAX exchange for small-caps were shut down last week, the previous having actually lost a shocking 96 percent of its value considering that March 2000. This compared to Britain's AIM, which lost "just" half its worth. Even Britain's infamous FTSE-TechMARK faded by a "simple" 88 percent.

Only 1 company floated on the Neuer Markt this year - compared with more than 130 two years ago. In an unprecedented program of "no-confidence", more than 40 companies withdrew their listings last year. The Duetsche Boerse assured to create two brand-new classes of shares on the Frankfurt Stock market. It belatedly pledged to introduce more openness and openness to foreign investors.

Banks have actually been accused by irate consumers of helping to list improper companies and providing deceptive advisory services. Lawsuit are pending versus the similarity Commerzbank. These proceedings may rush the bank's want to move from retail into private banking.

To even more intensify matters, Germany remains in the throes of a tsunami of corporate insolvencies. This long-overdue restructuring, though beneficial in the long run, could not have actually transpired at a worse time, as far as the banks go. Huge arrangements and write-downs have actually voraciously consumed their capital base even as running profits have actually dropped. This double whammy more than deteriorated the benefits of their unpleasant cost-cutting steps.

German banks - not unlike Japanese ones - maintain incestuous relationships with their customers. When it lastly collapsed in April, Philip Holzmann AG owed billions to Deutsche Bank with whom it had a cordial working relationship for more than a century. However the bank likewise owned 19.6 percent of the ailing building and construction behemoth and chaired its supervisory board - the antiques of previous shambolic rescue plans.

Germany competes with Austria in over-branching, with Japan in souring possessions, and with Russia in overhead. According to the German everyday, Frankfurter Allgemeine Zeitung, the cost to income ratio of German banks is 90 percent. Mass insolvencies and debt consolidation - voluntary or enforced - are inevitable, particularly in the cooperative, home mortgage, and savings banks sectors, concludes the paper. The procedure is a decade-old. More than 1500 banks vanished from the German landscape in this period. Another 2500 remain making Germany still one of the most over-banked countries worldwide.

Moody's don't put much stock in the cost-cutting measures of the German banks. Included competition and a "more realistic prices" of loans and services are even more essential to their shriveling bottom line. However "that light is not yet visible at the end of the tunnel ... and difficult market conditions are most likely to persist for the time being."

The woeful state of Germany's financial system reflects not just Germany's financial malaise - "The Financial expert" called it the "ill man" of Europe - but its failed effort to mimic and imitate the unmatched financial centers of London and New-York. It is a rebuke to the misguided belief that capitalistic models - and institutions - can be transplanted in their entirety throughout cultural barriers. It is incontrovertible proof that history - and the core competencies it generates - still matter.

When German insurance providers and banks, for example, branched into faddish organisations - such as the Web and mobile telephone - they did so in vacuum. Germany has couple of investor and American-style entrepreneurs. This misguided strategy led to a frightening erosion of the strength and capital base of the brave financiers.

In a sense, Germany - and certainly its eastern Lander - is a nation in shift. Risk-aversion is giving way to risk-seeking in the forms of investments in equities and derivatives and equity capital. Household ownership is slowly supplanted by stock exchange listings, imported management, and mergers, acquisitions, and takeovers - both friendly and hostile. The social agreements concerning employment, pensions, the role of the trade unions, the balance in between human and pecuniary capital, and the carving up of monopoly market specific niches - are being re-written.

Global combination suggests that, as sovereignty is moved to supranational entities, the cozy relationship in between the banks and the German government on all levels is over. Last October, Hans Eichel, the German financing minister, revealed OECD-inspired anti-money laundering procedures that are most likely to compromise bank secrecy and client anonymity and, therefore, harmed the German - often dirty - banking business. Erstwhile rampant federal government intervention is now reduced or straight-out restricted by the European Union.

Therefore, German Laender are forced, by the European Commission, to partially abolish, three years hence, their guarantees to the Landesbanken (local advancement banks) and Sparkassen (thrifts). German diversity to Austria and main and east Europe will supply only short-term break. As the EU expands and digests, at least, the Czech Republic, Hungary, and Poland in 2004-5 - German franchises there will come under the uncompromising remit of the Commission once again.

In basic, Germans fared even worse than Austrians in their extraterritorial banking endeavors. Less cosmopolitan, with less direct exposure to the parts of the previous Habsburg Empire, and dealing with a stagnant domestic economy - German banks discovered it hard to turn main European banks around as successfully as the similarity the Austrian Erste Bank did. They did make inroads into niche structured financing markets in north Europe and the USA - but these appear to be random expeditions rather a studied shift of company emphasis.

On the bright side, Moody's - though it preserves a negative outlook on German banking - kept in mind, in November 2001, the banks' "intrinsic financial strength and varied operating base". Tax reform and the hesitant introduction of private pensions are also trigger for restrained optimism.

Pursuant to the purchase of Drsedner Bank by Allianz, Moody's welcome the development of bancassurance and Allfinanz designs - monetary services one stop shops. German banks are also placed to reap the benefits of their substantial investments in e-commerce, innovation, and the restructuring of their branch networks.

The Depression on 1929-1936 may have begun with the crisis of capital markets, particularly that of Wall Street - but it was worsened by the collapse of the concatenated international banking system. The world today is much more incorporated. The collapse of one or more major German banks can result in alarming repercussions and not just in the euro zone. The IMF says as much in its "World Economic Outlook" published on September 25.

The Germans deny this diagnosis - and the diagnosis - vehemently. Bundesbank President Ernst Welteke - a board member of the European Reserve bank - spent the bulk of last week implausibly rejecting any crisis in German banking. These are mere "structural problems in the weak stage", he informed a press conference. Nothing debt consolidation cannot fix.

It is this consistent refusal to challenge truth that is the most uneasy. In the brief to medium term, German banks are likely to outlast the storm. At the same time, they will lose their iron grip on the domestic market as client commitment dissipates and foreign competition boosts. If they do not confront their predicament with sincerity and receptivity, they may well be lowered to glorified back-office extensions of the global giants.

Sam Vaknin is the author of Deadly Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a writer for Central Europe Evaluation, PopMatters, and eBookWeb, a United Press International (UPI) Elder Service Reporter, and the editor of psychological health and Central East Europe classifications in The Open Directory site Bellaonline, and Suite101.