Growth rebounds in Germany after a winter of stagnation

After a short period of economic stagnation end of 2009, partly due to adverse weather conditions, Germany has returned on its path to recovery. According to the Federal Ministry of Economics, manufacturing recorded a 5.1% month-on-month increase in new orders in January 2010, and this level remained unchanged in February. Especially foreign orders rose, as German exports increasingly profit from a weaker Euro exchange rate: according to the Federal Statistical Office, German exports increased 9.6% year-on-year in February 2010. That said, private consumption remained weak in the first two months of 2010. The OECD forecasts German growth to increase 0.7% in Q2 of 2010 compared to Q1. Overall, Crédito y Caución estimates German GDP to grow 1.7% this year.

According to the German Statistics Office, the number of corporate insolvencies increased 11.6% year-on-year - to 32,687 - in 2009. The courts estimate the value of expected outstanding receivables to be Euro 85 billion [2008: Euro 33.5 billion], due mainly to the increase in large company insolvencies. Despite the increased momentum of Germanys economic recovery, Crédito y Caución still expects corporate insolvencies to rise by 10% in 2010 compared to 2009, with automotive suppliers, metals/steel, transport and engineering the main victims. In contrast, insolvencies in information and communication technology and chemicals will probably stabilise. While further large insolvencies cannot be ruled out, Crédito y Caución expects a lower figure of large company failures than in 2009, with the consequence that the value of outstanding receivables will decline considerably.

In February 2010, the Expected Default Frequency [EDF] indicator in Germany dropped again from the previous month to 6,3%. This was 54 basis points lower than in February 2009, but still 34 points higher than in February 2008, before the credit crisis took hold.

An easing of credit conditions on the horizon?

According to the monthly Ifo institute Credit Constraint Indicator, in March 2010  38.7% of firms assessed banks lending policies as restrictive, 1.2% less than in February 2010 and 5.6% less than in December 2009 indicating that it has become easier for German businesses to obtain loans in recent months. However, the proportion of complaints from the construction sector about difficult access to bank loans increased, while remaining largely unchanged from small manufacturers.

In general, it seems that business lending conditions have gradually eased since our last report. Thanks to new issues in recent months, the securitisation market, which is pivotal for banks´ refinancing and equity relief, has been revived, albeit on a lower level than before the credit crisis. Worries voiced six months ago - that banks will cease to support many of the less promising or more cumbersome companies restructuring with additional liquidity - have not materialised. In most restructuring cases, banks have continued their support, as overdraft have been turned into secured credit lines and loans from the state-owned KfW banking group have been included.

Despite signs of a slight relaxation in the German credit market, it is still too early to talk of a turnaround. In particular, in the sectors mainly hit by the crisis, a large number of small and medium-sized enterprises still complain of difficulties in accessing loans. In its latest survey of German banks´ lending to domestic businesses, the Bundesbank expects new lending to be higher in 2010, but it remains to be seen if the volume of loans will be enough to satisfy increased business demands for finance triggered by the economic recovery. Thanks to active and prudent working capital management, many companies have closed the business year 2009 with a positive cash flow, and their demand for credit will be much higher this year, particularly as sales rebound. At the same time, businesses have yet to disclose their 2009 annual accounts to their banks, which, especially in troubled sectors, will be negative or even worse than in 2008. Therefore, it still remains to be seen how banks will respond to the deterioration of many borrowers´ ratings. Tighter equity regulations for banks could restrict their lending in cases where a companys creditworthiness has diminished, but it is hard to predict at the moment whether banks will limit lending based on borrowers past performance or take a more forward looking approach based on improved business expectations in 2010.  

Overall, continuing restrictions on lending cannot be ruled out, and this would probably hamper company investments. However, there is a trend of banks adopting different options to help companies, e.g. by providing loan renewals and extensions coupled with additional collateral, and by offering suspension of interest and repayments for a stipulated period instead of new money.