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July 2010 | ifr special report | 3


German Corporate Funding


IFR: Let’s kick off our discussion on perhaps one of the most significant themes of the day: the European economy and the lack of growth. Relative to the Eurozone, the US is looking quite healthy, emerging markets are shooting ahead, while there is little hope in the short-term for the UK economy. Is Germany the engine that’s going to drive Europe out of its current slow growth trajectory? On a more specific level, I’m also curious to get a sense of the situation German corporates find themselves in now, and what their general expecta- tions and aspirations are.


Thomas Kull, WestLB: I think there’s some truth in your comment about Germany. It’s clear that Germany won’t compete with the emerging markets in terms of growth rates long-term, but it will always be more stable and it has two main advantages from a macroeconomic perspective. First, Germany has regained a lot of cost compet- itiveness and, second, it has a lot of technology advantages that are important for the German export-oriented sector, so I think the Germany economy is on solid footings at the moment.


As for corporates, we obviously have lots of discussions with them. German manu- facturing companies are very experienced, and since the beginning of the year, they have witnessed a strong upswing in activity. Everybody had been very cautious and unsure about what 2010 might bring, but in the event many manufacturing companies have seen their expectations exceeded by quite a significant margin.


IFR: So are you saying that the economic recovery will be export led?


Thomas Kull: Yes.


Richard Curtis, WestLB: The strength of the euro is probably the key here, given the export-led country that Germany is. The euro has weakened significantly over 2010; there have been lots of commenta- tors saying it’s going to 1.15 or even parity


against the dollar. We’ll see, but in terms of getting competitiveness back, the euro has been overvalued for quite a lot of the latter part of this decade so if you know where the euro’s going, you’ve probably got a pretty good idea whether the economic recovery in Europe is going to be strong or not, and whether it’s going to be export-led or internal.


IFR: So are we going to see a divergence in performance between the export sector and the non-export sector? The data doesn’t suggest that internal demand is particularly strong. So will the internal economy continue to be a little bit weaker? How does that impact on the corporate sector?


Matthias Gaab, Deutsche Bank: Growth over the past few years has been driven by exports, and I think the main impact relating to domestic growth has been how this has translated into unemployment, or ‘non-unemployment’ via the short-time working scheme, for example1. Those industries or companies that have been solely focused on the domestic economy, such as department stores, for example, have suffered the most.


Marc Mueller, Deutsche Bank: If you look at European GDP data, it’s clear that Germany as a whole has been outpacing the rest of Europe, so in that sense the answer to your original question is, yes, Germany is definitely leading out of the crisis, and the point that Matthias made about the low unemployment rate is a crucial one because this has given Germany some momentum coming out of the crisis. Through this period, companies have done their homework with regard to cutting capacity, etc and now have much more stable platforms.


Mathias Noack, UniCredit: But the positives still only relate to export- orientated companies. We’ve been waiting for an upswing in domestic consumption for a very long time, and with tax rates


going up, people ultimately will have less cash in hand so export orientated companies will benefit. Growth will come from exports, not from internal factors.


Johannes Heinloth, BayernLB: Two related points here are how much additional capital will be required for the banks to be sufficiently capitalised, and how much debt is coming up for refinancing. The results of the stress tests on German banks were pretty good, which was encouraging because this is directly connected to the sovereign debt issue and the exposures of German banks. But if you look at how much additional capital the European banking sector needs, it’s around €300bn.


And if you look at the amount that needs to be refinanced within the next two to three years, it’s a big number. I think there will be competition between corporates and sovereigns because they have the same sources of funding; the bond market in particular. The LBO market is another market where huge refinancing volumes are coming up, particularly in 2014 and 2015.


This sovereign debt crisis has certainly exaggerated the whole situation and makes it a little bit more difficult for us. But bankers are smart guys and I’m pretty certain, because we have some time here, that we will be able to find solutions to cope with the wave of refinancing coming up.


Richard Curtis: The crowding-out issue Johannes mentions is an interesting one at the moment, as is the issue of pricing rela- tionships. Historically, the sovereign was the risk-free rate and we priced things up from there. We got a situation after the Lehman crisis where corporates were shut out of the bond market for most of 2008 and then in November 2008 RWE, E.ON and BMW did deals at very wide spreads and everybody said: “Wow, how can they afford that?” At the time, corporates were getting squeezed by the banks and they realised that they needed to grab liquidity when it


1The German government established a subsidised short-term working scheme –Kurzarbeit –to keep a lid on unemployment. The scheme runs to March 31 2012.


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