IFR Germany Special Report 2013
Germans like to think of their economy as the “engine” of the eurozone: when it comes to bailouts for countries such as Cyprus it is to Berlin that its currency partners turn. But this role of eurozone champion, and backstop, is not universally appreciated by either the German electorate or those of the rescued countries.
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Politicians preaching to their neighbours have also administered their own austerity medicine at home to maintain a semblance of economic sanity amid the eurozone malaise.
Consensus points to the German economy growing 0.2%–0.6% in the first quarter, while full-year GDP could come in at about 1%. The country’s relative economic strength, while much of Europe flounders, is partly due to economic reforms implemented a decade ago. A manufacturing revival and resilient funding instruments such as Pfandbriefe have helped.
But Germany cannot continue carrying the continent on its shoulders: the eurozone is its most important trading partner, but a happy ending relies on other parts of Europe sharing the burden.
For now there are few alternatives to investing in the Teutonic nation. The search by risk-averse investors for safe berths is expected to bring €27bn into German real estate this year. Fears of a faltering recovery have restrained absolute investment from the dizzy heights of 2007, but the hunt for yield has put a spotlight on property portfolios.
The greater success story is that of the automakers, still at the centre of the German corporate bond market. Capital market funding activity has increased as big bond redemptions loom in the not too distant future for the big carmakers. These maturity pressures have led to flexibility in approaching the markets with, for example, nimble Daimler funding in nine currencies this year.
Other German industrials have also been active in the bond markets. Even the prospect of a general election later this year has failed to dim demand from investors.
But the status of being the only port in the storm is not entirely helpful, as deal-making is held back by lack of confidence in the rest of the eurozone. M&A activity remains focused on refinancing rather than cross-border purchases. Small transactions predominate and bankers have to offer more creative solutions as they look forward to a return of market confidence.
One product that is struggling with a lack of supply is Pfandbriefe, as eurozone banks attempt to deleverage their balance sheets. This means demand is overwhelming and pricing tight. With issuance patterns unlikely to change in the coming year and supply so far a third down on last year, the best that bankers are hoping for is a pick-up in the third quarter.
That other uniquely German product Schuldscheine is however enjoying a boom after volume more than doubled in 2012. The switch from niche funding tool (so niche banks don’t agree on whether it should be sold to bond or loan investors) to maturing market is best illustrated by French company Neopost selling its issue exclusively in Taiwan.
The bitterest of medicine in recent years has been taken by the Landesbanken, but after a process of restructuring the outlook appears to have improved – for those that remain – with the focus now on financial security and restructuring. Their role in lending to the Mittelstand is crucial to maintaining growth.
The pleasures and pain of currency union continue to plague Germany, with investors attracted across its borders, but unable to shake off the fear of the periphery’s impact. But as the free-spending southern nations are gradually being brought to heel, Germany may soon stop treading water.