In many ways it has been a fantastic 12 months for Germany. Some of the markets for which it is most renowned have witnessed an impressive return to form that almost constitutes “business as usual”. The Pfandbrief sector, the financial market most synonymous with Germany, has in some ways shrugged off memories of the credit crunch and looks to be in rude health.
But closer inspection reveals the last two years have left scars. While the position of Pfandbriefe as a key funding tool for German corporates is not in question – and spreads have returned to very healthy levels – insiders concede that issuance can never replicate former glories. And while some bankers may pat themselves on the back for hosting the world’s flagship covered bond market, its failure to take root in so many countries takes the edge off its sense of pride. The Pfandbrief market still yearns for the flattery of imitation, particularly in the US.
It has also been a strong year in some of the markets for which Germany has not traditionally been so synonymous. Its loan market has strengthened in recent years, enabling it to hold its head up high in lending circles, but only recently has it had a realistic claim to be Europe’s leading loan market. The health of German companies, itself the product of a prudent national character, carries much of the credit for this, while attention has been paid on fostering strong relationships, able to survive the vagaries of a fickle market.
Of course, Germany’s size and location has tended to make it a significant player in most markets. But the bigger they are, the harder they fall. The country, which had in the early days of the credit crunch fancied itself to be immune, was upended by the crisis, finding that its reliance on exports exposed it to those profligate countries it had been so careful not to emulate. Its structured finance industry was the obvious casualty, the market being decimated everywhere, but its prevalence among its many auto exporters exacerbated the impact.
The equity market’s malaise was perhaps less predictable. Germany went from being one of the biggest equity capital markets in Europe to fall behind Kazakhstan during the downturn. But its return to form was just as dramatic, with a single trade at the start of the year surpassing issuance levels for three quarters at the end of 2008 and the first half of 2009.
The question here is whether such energy levels can be maintained: many suspect the market has peaked early, and will have run out of puff going into the second half. Yet bankers remain sanguine: having notched up a fantastic year in 2009 and an equally impressive quarter in early 2010, they can afford a dip in fee income later in the year.
One major question mark hanging over the whole of the German market is how it will be overseen in future. Politicians are gunning for its regulator, BaFin, and plans are afoot to instil its central bank with choice regulatory functions – echoing similar plans in the UK. Yet for all the will of Germany’s political masters, the result is not a foregone conclusion. Numerous voices are speaking out loudly against the idea, while various unresolved questions relating to conflicts of interest refuse to go away.
Whether the outcome of these debates will shape the markets themselves over coming years is another question entirely. Many argue – as they have in the UK – that the debate is a sideshow, designed to make it look like politicians have taken action. Whether structural changes can make as significant a difference as hiring more regulators would remains to be seen. Either way, markets fear uncertainty, so the regulatory tug-of-war will continue to attract attention.