Credit investors believe that Germany's predicament is not temporary.
Zhitong Finance and Economics has learned that due to economic stagnation, the real estate crisis and the highest corporate bankruptcy rate in Europe, bondholders demand that the bond spreads of German companies be higher than the overall level of the eurozone. This trend has been intensifying since the outbreak of the Russia-Ukraine conflict caused electricity prices to soar in Germany.
Bad news followed. After the economy contracted in the last quarter of last year, a pessimistic preliminary survey for 2024 suggests little respite ahead. The disappointing performance sparked a debate about whether Germany was once again the "sick man of Europe" – a nickname that Germany first earned after German reunification in the 1990s, when the country's economic growth was sluggish and unemployment was high.
Borrower demand for investment in areas such as machinery, plant and technology has already declined, and Germany's long-term economic growth could be hampered as companies focus on navigating the current predicament. Now, there are growing concerns about the exposure of some lenders to the shaky U.S. housing market.
Brian Mangwiro, manager at the Bank of Bahrain, said: "Germany is really in trouble. "All large manufacturing economies are slowing down, but in Germany, energy costs** have exacerbated the situation. The automotive industry is also facing challenges from China. ”
Since the outbreak of the Russia-Ukraine conflict, interest rate differentials between German and European companies have risen.
At the World Economic Forum in Davos last month, executives did not look optimistic about Germany. Their view is that as technology advances and competition intensifies in everything from machinery to automobiles, including electric vehicles, Europe's largest economy has lost its reputation for stability and will face a difficult time.
According to the Weil Europe Distress Index, "the country's economic outlook remains bleak" due to stagnant profitability and liquidity pressures.
The interest rate hikes in the past two years have made matters worse, especially exposing the problems of the real estate market. Deutsche Bank said on Wednesday that it had increased provisions for loan losses due to "continued weakness" in the housing market.
More than $13.6 billion in loans and bonds issued by German companies fell into trouble last month, 13 times more than Italy, according to data compiled by Bloomberg News. According to a report by consulting firm Alvarez & Marsal, around 15% of companies in Germany are currently in trouble, the highest percentage in Europe.
Christian Ebner, managing director of the financial restructuring advisory team at Alvarez & Marsal, said the distress was spreading outside sectors such as real estate, construction and retail, which had been hit by inflation and rising borrowing costs. "Manufacturing is starting to suffer" and the automotive industry "will continue to be a problem".
Germany's uncertain political outlook is also putting pressure. Christian Sewing, CEO of Deutsche Bank, said concerns about the rise of the far-right AfD party had led to a reduction in investment.
Organic in danger
Some see an opportunity to take advantage of these troubles. Bankers and advisers at Davos said private equity firms are being drawn to Germany because pressure is emerging, and they are looking to buy family businesses cheaply and drive operational improvements.
Victor Kholsa, founder and chief investment officer at Strategic Value Partners, said the industrial recession meant "an opportunity to take out high-interest loans, or to buy more leveraged companies by injecting equity." "We can really see opportunities like that. ”
Direct lenders such as Ares Management and Blackstone have opened offices in Frankfurt and are actively seeking to lend to German businesses, including financing private equity acquisitions.
Short sellers are also looking to profit from this, betting €5.7 billion on companies in the country. Qube Research & Technologies is heavily short Deutsche Bank, Volkswagen and housing company Vonovia AG, among others.
Real estate crisis
The short bet on Vonovia is indicative of concerns about the German property market. Real estate company Adler Group SA is at risk of being liquidated, and Signa, which owns a large number of German properties, filed for bankruptcy at the end of last year.
The rise in interest rates has already led to a nearly 11% increase in residential properties from their peak in 2022. Analysts at Jefferies expect the value of German office buildings to average around 40% from the peak to the bottom**, potentially triggering asset write-downs for borrowers and lenders.
Florian Heider, former head of the ECB's financial market research department, said that although the financial system has performed well in recent years through multiple turbulences, weak commercial real estate and economic growth will be a concern for the future of the German banking sector. The big question, he added, is whether they have proper risk management in place and have enough capital set aside for losses.
The real estate market needs to be watched very closely," said J Rg Rocholl, Dean of the ESMT Business School and Advisor to the German Ministry of Finance. He said the reduction in mortgages has also hurt the profitability of banks.
Credit defaults
The Bundesbank warned in November that 15 savings banks and 37 credit unions would have negative "present value of bank accounts" by early 2023, adding that they appeared to be particularly vulnerable to rising interest rates. Since then, the ECB's interest rate has risen by 2 percentage points.
One-third of commercial real estate loans in Germany face higher borrowing costs within three years, which could lead to a sharp rise in credit defaults and impairments, the regulator said.
Many companies and landlords have embraced the mantra of "survive until 2025", arguing that cutting interest rates will make the debt burden more bearable and increase transactions. Traders are currently betting that the ECB will cut interest rates five times this year, each by 25 basis points.
Alvarez & Marsal's Ebner said: "This is the silver lining behind the horizon against a backdrop of macro challenges for businesses still facing. "Until lower interest rates translate into a tangible capital markets solution," we will continue to see pressure. ”