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Berlin, Germany (AHN) – Signs of an economic contraction in Germany’s economy raised fears of a recession in Europe.

The news escalated concern that demand for oil might fall, causing oil futures prices to drop by as much as 1.1 percent. In addition, the euro weakened against the dollar.

Germany has long served as the engine for economic growth for the entire European Union. Therefore, news that the German economy likely shrank by 0.25 percent during the last three months of 2011 caused alarm and has observers worrying the European Union might slide back into a recession.

Official figures from the Federal Statistics Office show that the German economy only grew by 3 percent during 2011 and that was only achieved because of strong growth during the first half of the year.

Moreover, the Statistics Office said that most of the growth during the first six months was driven by domestic demand. The Statistics Office based the annual figure on an estimate of fourth quarter growth. However, the government won’t post the official data for the last quarter until Feb. 15.

In the meantime, Norbert Raeth from the Statistics Office announced at a press conference Wednesday that the economy likely shrank by “around a quarter of a percentage point” in the fourth quarter.

Although the 3 percent growth rate was down from the 3.7 percent in 2010, Germany still had a stronger figure than the United States or the EU.

According to the Organization for Economic Co-operation and Development (OECD), among its member nations Germany showed better growth than the expected growth rate of the following nations:

• U.S. 1.7 percent
• France 1.6 percent
• United Kingdom 0.9 percent
• Italy and Spain 0.7 percent

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The yen fell against the euro for a fourth day and the dollar weakened on signs that central banks will have to maintain record stimulus in two of the world’s largest economies. Asian stocks climbed for a second day, silver rallied, and the currencies of Singapore and Malaysia gained.

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The euro and won gained for the first time in three days on concern rising oil prices will spur inflation and prompt central banks to raise interest rates. Crude climbed to a two-year high, while Asian stocks fluctuated.

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Euro overnight bank lending rates have ‘normalised’ while lenders have scaled back the sums held at the European Central Bank above reserve requirements

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Spain announced Monday plans to strengthen its banks by increasing the reserve capital requirement to try to quell fears the country might be Europe’s next to need a bailout.

Spain’s borrowing costs dropped significantly in a heavily oversubscribed auction of 2.2 billion euro ($3 billion) in short-term debt Tuesday, a day after the government announced reforms for its ailing savings bank sector.

The Treasury said demand for the 3- and 6-month bills was about five times the amount sold. The average interest rate in the 3-month bill sale was 0.9 percent, down sharply from 1.8 percent in the last such auction Dec. 21. The rate for 6-month bills was 1.8 percent, down from 2.6 percent last month.

Spain announced Monday plans to strengthen its banks by increasing the reserve capital requirement to try to quell fears the country might be Europe’s next to need a bailout. The plan is to be passed by decree next month and will give the saving banks, or cajas, till September to meet the requirements.

Trading on the Madrid index was down 1 percent Tuesday following the announcement with banks being the worst hit.

But the yield on 10-year bonds continued to hover around the 5.2 percent mark, making for a spread, or difference, of around 2 percentage points with the benchmark German equivalent.

Finance Minister Elena Salgado said the saving banks would need 20 billion euro($27 billion) in new capital to meet new reserve requirements of 8 percent for all banks, up from 6 percent.

Speaking Tuesday she said that the average core capital ratio for Spain’s banks at the moment was above 8 percent.

She said a government fund set up to help the savings banks might eventually partially nationalize those entities that cannot meet the new criteria of raising capital on the open market. These banks, or cajas, would have to become proper banks listed on the stock market to qualify for this type of intervention by the fund.

Concerns about Spain’s banking system, particularly the cajas, has hampered the government’s bid to convince investors that economy is on the right track and will not need a bailout like Ireland or Greece.

Spain is battling to emerge from nearly two years of recession following the collapse of its key real estate sector, which coupled with the international financial crisis has left the country with near 20 percent unemployment and a swollen deficit.

The cajas were the most exposed in housing market and have been left with billions in unpaid loans.

Salgado said the aim of the restructuring is to “dissipate any doubt about the solvency of lending entities.”

In an analysts note, Barclays Capital Research said “recognition of the insufficiency of capital buffers in the system is a step in the right direction” but doubted that the weak saving banks will manage to raise the needed funds in the market and that in end some $46 billion would be need in recapitalization.

Tullia Bucco of Milan-based UniCredit Research also said the government is underestimating the banks’ recapitalization needs.

The reform announcement came as the International Monetary Fund revised downward its growth figure for Spain for 2011 by a tenth of a percentage point to 0.6 percent, which is less than half the government’s prediction.

Speaking Tuesday, Salgado said Spain’s deficit-reduction drive was going well and closed 2010 with better than expected numbers. Preliminary figures for the central government’s deficit for the year came in at 5.1 percent of GDP, compared to 5.9 percent previously forecast, she said. Numbers for regional government spending are not yet available.

The government’s goal for 2010 is for a total Spanish deficit equivalent to or less than 9.3 percent of GDP, then down 6 percent in 2011.

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Last week’s currency trading review The Dollar struggled against a Euro led market with most pairs gaining on the major. Economic data is strong from the US lately but this not always translating to USD strength with stock markets the key director. Weekly Jobless Claims dropped to 404k vs. 441k prev.

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The price of gold increased amidst fears and concerns that the crisis with debt-hobbled European banks may become even deeper, Bloomberg reports.Immediate-delivery bullion increased 0.5 percent to $1,376.20 per troy ounce just before 6 p.m. in Seoul after having lost 3.6 percent last week, the first week of the new year.

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Yields on U.S. Treasuries climbed to seven-month highs in Asia on Wednesday and the dollar rebounded as upbeat retail sales data added to evidence that America’s economy is gathering steam.

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The dollar gained modestly against the yen and euro in Asia Monday as investors placed cautious bets that recently stronger U.S. economic data will continue to buoy the greenback. The dollar may continue to rise on any further gains in U.S. Treasury yields, which make the U.S. unit more attractive to hold, dealers said. Yields rose Friday following strong data on U.S. consumer sentiment.

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A German government source said the ministers were also discussing Portugal and its possible need of an EU bailout.

The European Union was poised to approve an 85 billion euro ($115 billion) rescue for Ireland on Sunday and announce outlines of a permanent system to resolve Europe’s spreading debt crisis, a euro zone source said. Finance ministers from the 16-nation euro zone, anxious to prevent financial market contagion from engulfing Portugal and Spain, met to endorse an emergency loan package to help Dublin cover bad bank debts and bridge a massive budget deficit. A German government source said the ministers were also discussing Portugal and its possible need of an EU bailout. Under pressure to take dramatic action to arrest a systemic threat to the euro, the leaders of Germany and France, the EU’s two central powers, agreed in principle with top EU officials on the broad lines of a permanent crisis-resolution mechanism. Crucially, private bond holders would be expected to share the burden of any future sovereign debt restructuring of a euro zone country on a case-by-case basis, the source said.

The heads of the European Commission, the European Central Bank, the European Council and euro zone finance ministers discussed the Franco-German proposal by telephone on Sunday.

All 27 EU finance ministers were expected to endorse the broad outlines of the longer-term plan before markets open in Asia on Monday, the source said.

“You know that we have a very serious situation, we have to do our utmost to protect the foundations of our economic recovery,” EU Monetary Affairs Commissioner Olli Rehn told reporters on arrival for the Brussels talks.

He said ministers would go beyond endorsing the EU/IMF aid package for Ireland and “discuss the systemic response to this crisis”. But it was unclear how much detail would be announced about a long-term financial safety net. “Fine-tuning”

The lack of detail in an earlier Franco-German deal on a permanent crisis mechanism, agreed last month, and talk of private investors having to take losses, or “haircuts”, on the value of sovereign bonds, helped drive Ireland over the cliff.

EU sources said a team of specialists from the Commission, the ECB and the International Monetary Fund had finalised a deal with Irish authorities in Dublin after 10 days of negotiations.

However, some key details, notably the interest rate and the term of the loans, expected to be between three and six years, would be finalised by ministers.

French Economy Minister Christine Lagarde said the loans would total 85 billion euros. The EU sources said 35 billion euros was earmarked to help restructure and recapitalise Ireland’s shattered banks while 50 billion euros would go to help fill the hole that guaranteeing bank debts has blown in public finances. Convince markets

With anxiety rattling bond markets, the Irish government has been under intense pressure to accept a bailout despite repeatedly saying in recent weeks that it did not need one.

European leaders are hoping that the package for Ireland, drawn from a 750 billion euro rescue fund agreed by the EU in May this year, will convince markets that the crisis can be contained and spare Portugal and Spain, the next two countries identified as potentially at risk.

Debt worries have driven the crisis for the past year almost without respite. It has severely dented confidence in the 12-year-old euro currency and produced what amounts to a showdown between European politicians and financial markets.

In a flurry of phone calls over the weekend, French President Nicolas Sarkozy spoke with German Chancellor Angela Merkel and the leaders of Italy, Spain and Portugal.

Tens of thousands of Irish took to the streets of Dublin on Saturday to protest the looming bailout, and Irish opposition parties said they would not accept excessive rates of interest.

The parties, Fine Gael and Labour, are expected to rout unpopular Prime Minister Brian Cowen’s Fianna Fail party in an election likely within months. They have said they would be bound by a rescue deal but may try to renegotiate details.

Both parties want bond investors who lent money to Irish banks to take on a bigger share of their country’s bailout burden, rather than foisting it all on Irish taxpayers.

Jitters sent the shares of European banks which hold the debt of Irish banks tumbling on Friday. The euro also fell to atwo-month low against the dollar and the borrowing costs of Ireland, Portugal and Spain stood near record highs.

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