LIKE EVERYONE ELSE, I’ve been watching with interest as Germany adopts a more accommodative stance towards France and the latter’s struggle to reach its 3% budget deficit target in return for a firm commitment to economic reform.
Supportive comments from German finance minister Wolfgang Schaeuble – which were 100% in agreement with Mario Draghi’s Jackson Hole comments about the need for governments to push structural reform and implement accommodative fiscal policies to take the pressure off monetary policy from the heavy lifting around deflation, stimulating demand and improving competitiveness – were similarly interesting as a manifestation of Berlin’s softer stance.
Germany is clearly becoming more responsive to the constant calls to leverage the advantages of its balanced budget to introduce some flexibility around economic austerity and implement stimulus measures at home – even (perhaps rather counter-intuitively) by managing a relative reduction in its own competitiveness to boost that of other eurozone member states.
I imagine that because of Germany’s second-quarter economic contraction, the impact of Russian sanctions and flat-lining inflation, Schaeuble also sided with Francois Hollande in calling for new public and private investment to facilitate growth.
German SMEs aren’t suffering at all from a paucity of either bank or non-bank funding
AWAY FROM POLITICAL rhetoric in the real world of capital markets, all this talk of relative advantage being derived from a position of strength and the greater policy elasticity to which it gives rise got me thinking about an SME funding roundtable I hosted in Frankfurt recently.
The lack of funding out to the real economy and the paucity of cash for capital investment has, of course, been cited as a major blocker of growth and investment in Europe. So I’d gone to Frankfurt, armed with my usual list of themes and topics – bank deleveraging, the stricter regulatory climate and the likelihood of alternative capital sources (bonds, private placements, non-bank lending etc) emerging to fill the funding gap – to get a sense of how these issues were playing out in Europe’s largest economy and to gauge how Germany was dealing with it.
But what I came away with was almost shocking insofar as our distinguished panelists told me that German SMEs aren’t suffering at all from a paucity of either bank or non-bank funding. In fact, they’re spoilt for choice; I’d asked, for instance, if banks were excited at the prospect of SME securitisation as a lay-off risk mitigant that would ride to the rescue of bank lending. The answer: we don’t do rescuing.
While there is a clear move by Germay’s larger mid-caps to diversify away from syndicated lending and Schuldscheine into alternative sources, the driver isn’t necessarily the lack of either; it’s much more about maximising the benefits of greater choice and driving home the advantages to be gained from doing so.
German large-cap companies are so over-banked that domestic banks have naturally moved to the next tier down to capture some wallet in a theoretically less busy segment of the market. But guess what? They’ve all done the same thing and have been followed there by foreign banks, creating a fiercely competitive environment and by definition a seller’s market that is leading to longer tenors, edgier structures (cov-lite) and of course better pricing.
“The key issue is not that there’s not enough financing available for mid-cap companies, in some respects, there’s too much available. There is huge competition between banks and there are more and more banks entering Germany in the SME space so I don’t think you need to be worried about the clients; you should be worried about the banks as they’re cutting margins and their lending standards are getting looser and looser,” one panelist said. “So from that point of view I think you should not be worried about the Mittelstand in Germany.” I doubt anyone’s going to be worried about the banks but it’s a point well taken.
Bankers are finding investor’s willingness to buy at ever-tighter spreads almost alarming: “ … we’re not seeing an over-arching tendency towards deleveraging at the moment. We have an over-supply of liquidity and issuers are getting it cheaply because there is a hunt for yield on the investor side. One of the issues here is that people are taking higher risks than are probably reasonable … the market remains wide open for any type of product,” said another of our panelists.
THERE IS some interest in working towards Europe-wide solutions away from,say, the Schuldschein market as in the absence of a European version of the NAIC, things like EuroPP will provide a better method of evaluating credit risk at a regional level. That said, the counter development of the German Private Placement product to increase insurance participation in SSD, shows that there is still appetite for ‘Made in Germany’ capital markets products.
To that point, German insurance companies are directly approaching Mittelstand corporates in greater numbers with slugs of multiple €10m in their back pockets to lend via bilateral private placements. This is happening with greater regularity; the only thing that’s keeping them from more directly assaulting the core banking proposition is – remarkably – their inability to compete on price with the banks, which first of all price in the ancillary piece but which are utilising the benefits of much lower funding costs to pass on savings to their clients.
Mid-Cap Germany shows beyond doubt that we’re in a multi-speed Europe where the laws of relative advantage in access to capital appear to be self-sustaining.
