Germany’s risk spike is not just election related

There are numerous risks for the government to address as the country prepares to elect a new parliament in September.

  • By Jeremy Weltman
  • 07 Aug 2017
Email a colleague
Request a PDF

Shedding 2.3 points this year alone, Germany’s risk score has plummeted more than any other G10 or EU member state in Euromoney’s country risk survey.

The falling score extends a longer-term decline, which has seen the country slide to the bottom of the top tier of triple-A sovereign borrowers, to 13th in the global rankings, on less than 80 out of a maximum 100 points.

It is now barely a point higher than Hong Kong in tier two, questioning Germany’s ability to remain a tier-one investment.

Germany

The political uncertainty connected to the federal voting on September 24 is a notable factor, although the risk implications are limited with the rise of the populist-right now thwarted by returning confidence in the centre-right conservatives.

Chancellor Angela Merkel’s prospects of success have greatly improved after a rocky patch in the opinion polls linked to her unpopular ‘open-door’ immigration policy and nagging concerns about the economy last year.

However, her Christian Democratic Union (CDU) and Bavarian sister party the Christian Social Union (CSU) are not assured of a majority.

The conservatives might, in fact, lose seats based on the opinion polls signalling CDU/CSU will land around 37% to 40% of the vote, compared with 41.5% at the last election in 2013.

And many in the grand coalition, pairing CDU/CSU with the centre-left Social Democratic Party, want to end their marriage of convenience.

However, renewing it still seems the more likely option, as any other would restrict the possibility of a strong and stable majority, and there are those party members on both sides who do seem willing to continue their consensus-driven alliance in the national interest.

Positively, the economy is improving, and an efficient labour market has become tighter, with unemployment falling, supporting the fiscal metrics.

Yet these short-term positives are masking several risks, ranging from the ability to agree on policies for a second term to the economy overheating, since it has been growing beyond its potential for several years.

Many experts have been warning for some time the economic boom is deceptive. It will create resource shortages and drive up wages to uncompetitive levels, spurring inflation.

Social expenditures are rising due to mass immigration connected to the asylum crisis and population ageing, in addition to a growing sense the government is not investing enough in the public infrastructure to be able to cope with the demands.

Three of Germany’s four structural risk indicators, for its soft infrastructure – such as healthcare services – and demographics have been marked down on a year-on-year basis, along with the score for industrial relations and other economic and political indicators:

Germany2

One of Euromoney’s survey contributors, Henning Kehr, a professor at the University of Applied Sciences in Worms, notes many possible factors weighing on Germany’s prospects.

Along with the structural problems “there is the ‘dieselgate’ scandal and investigation into a possible cartel in the car industry”, he says. Given the importance of the automotive sector to the German economy, this is significant, he believes.

Kehr also notes the real-estate bubble, which is not an imminent risk, but might be storing up problems, sparked by the ultra-loose monetary policy that is necessary to maintain the economy recovery and admonish deflation.

The OECD’s latest global economic outlook also notes that “government investment falls short of depreciation of the capital stock, especially in low-income municipalities, and will need to be increased”.

The OECD mentions the highly leveraged position of the large banks, a factor weighing on the bank stability risk score, which has fallen on a year-on-year basis, noting that implicit government guarantees “may exacerbate inequality, impair efficiency and encourage banks to assume more risk, and pay higher salaries”.

Investing in Germany has long proved to be a safe-haven option. The economy is growing and the political risks should ease after the election, when the new government is formed.

However, these are difficult times for the European Union, and Germany still has a large debt burden and pressure to invest more in public services. Its rock-solid business reputation is under closer scrutiny and the effects of Brexit are difficult to determine.

It might be time for investors to begin challenging the view Germany offers rock-solid safety, when there are other sovereign borrowers providing fewer risks.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.

  • By Jeremy Weltman
  • 07 Aug 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 313,117.00 1169 8.99%
2 JPMorgan 284,084.45 1296 8.16%
3 Bank of America Merrill Lynch 281,023.48 968 8.07%
4 Goldman Sachs 212,563.64 697 6.10%
5 Barclays 203,259.32 781 5.84%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Deutsche Bank 31,971.88 102 6.87%
2 HSBC 31,940.18 140 6.87%
3 Bank of America Merrill Lynch 29,065.55 82 6.25%
4 BNP Paribas 24,679.63 135 5.30%
5 SG Corporate & Investment Banking 22,195.55 122 4.77%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 14,960.44 66 7.87%
2 Morgan Stanley 13,992.90 72 7.37%
3 Citi 13,566.56 83 7.14%
4 UBS 13,028.25 52 6.86%
5 Goldman Sachs 11,994.74 65 6.31%