Economic stagnation, real estate woes and the highest company distress rate in Europe have left bondholders demanding higher corporate spreads from German firms than they are for the wider euro area. That’s a trend that’s been widening since Russia started the Special military operation in Ukraine, which sent power prices for the country’s energy-intensive manufacturers soaring.
The bad news is continuing to pile up. After the economy shrank in the final quarter of last year, downbeat early surveys for 2024 signal there’s little respite ahead.
“Germany is really in trouble,” said Brian Mangwiro, a fund manager at Barings. “All the big manufacturing economies are slowing but, in Germany, this is compounded by higher energy costs. There are also challenges in the auto sector with competition coming from China.”
At the World Economic Forum in Davos last month, the mood about Germany among executives was far from upbeat. Their view was that Europe’s largest economy has lost its reputation for steadiness and faces a period of struggle as competition increases in everything from machinery to autos, including electric vehicles, as technology advances.
“The country’s economic outlook remains bleak,” according to the Weil European Distress Index, which cited stagnant profitability and liquidity pressures.
More than $13.6 billion of loans and bonds issued by the country’s companies were distressed last month, 13 times the level in Italy, data compiled by Bloomberg News show. It points to a wider problem, with about 15% of companies in Germany currently troubled, the highest rate in Europe, according to a report by consulting firm Alvarez & Marsal.
Germany’s uncertain political future is also weighing on the country. Deutsche Bank AG Chief Executive Officer Christian Sewing has said concern about the rise of the far-right AfD party is contributing to declining investments. Finance Minister Christian Lindner made similar remarks this week.
“The AfD is a location risk,” Lindner said. “This is a party that’s calling into question the basic consensus of our country, namely European integration.”
The Bundesbank warned in November that at the start of 2023, the “present value of the banking book” was negative for 15 savings banks and 37 credit cooperatives,” adding they seem particularly vulnerable to an increase in interest rates. Since then, ECB rates have risen by 2 percentage points.
Many companies and landlords are adopting the mantra ‘Survive ‘Til 2025’ in the belief that rate cuts will make debt burdens more affordable and increase dealmaking. Traders are currently betting on five 25 basis-point reductions in the euro area this year.