Germany Report 2009
If only financial crises were more discriminate in the havoc they wreak. Unfortunately for Germany, the downturn has had scant regard for economic justice: the prudent savers and the hard workers have seen their economies savaged with vigour that is almost indistinguishable from what has been witnessed by the spendaholic Anglo-Saxons.
The last 12-18 months have illustrated the full extent of how interconnected financial markets have become, for better or worse. The vulnerability for the Germans has been their reliance on the export sector to drive the economy. Declining consumption was always going to have an effect, but the extent of that decline caught many by surprise.
No industry symbolises this malaise better – in Germany or globally – than autos. Germany, home to sector giants such as Volkswagen and Porsche, as well as Ford’s European operations, is renowned for its car industry. Taking into account the parts suppliers that feed off these companies, the sector employs millions. Yet with people around the world tightening their belts, fundamental questions are being asked about the viability of the car industry, when the market has long-since reached full penetration in the developed world. Put simply, how many people who already have a car are going to replace it in the middle of the worst financial downturn for several generations?
To add to their woes, German auto manufacturers were among the big players in the securitisation market, which has been among the more spectacular sub-plots to the downturn. A once vibrant marketplace of investors happy to take on securitised German auto debt has disappeared, meaning new securitisations have had to be retained.
Anyone looking for cheerier news had better not go looking for it in the equity markets. After 2008 had raised hopes for a year of resilient strong performance, 2009 has – so far at least – failed to deliver. Things look so bad that some banks are even said to be considering closing their ECM businesses, as Germany has slid to tenth in terms of issuance volume for Q1.
In terms of debt, there are, however, glimmers of hope. After a difficult start to the year in the loan market, with volumes down on the same period last year, there is certainly no cause for complacency. But there is some evidence that the worst could be over. Refinancings, in particular, should provide a steady souce of business.
German sovereign bonds, too, can at least continue to bask in the prestige for which they are famed, although even this has become a mixed blessing. The spreads of German agencies have steadily widened, relative to the sovereign that backs them, making their funding position increasingly difficult. The good news is there seems no prospect that the asset class will lose its status as best in breed for European sovereign debt.
The same goes for Pfandbriefe. The asset class exemplifies prestige and is still regarded as a product of the highest quality. Yet the outlook is muddied by the impact the government guaranteed market has had on demand, and the ensuing identity crisis Pfandbriefe have suffered. Covered bonds are not going to disappear from the financing landscape, but when the dust has settled on the global downturn it seems inevitable they will have had to find a new niche for themselves.