Germany Monitor

In our empirical analysis we investigate the substitution between weak bank lending and lush bond markets and we show that rising bank CDS spreads are consistently associated with positive growth in securities underwriting and negative growth in loan syndication. This suggests that banks and clients switch funding instruments in times of financial stress. In this regard, a well-developed bond market is an important element to increase financial resilience as it offers an alternative source of funding for the real economy and an alternative source of revenue to banks. However, we also note a worrying trend towards financial fragmentation during times of stress which limits diversification potential. [more]

The massive expansion of renewables in the last few years has led to an increase in the volatility of the power supply. As the implementation of the "Energiewende" is one of the crucial issues for the new federal government, this also requires innovative solutions that go beyond traditional technical storage facilities in our view. Looking ahead, the energy revolution may hardly succeed without power-to-gas as power-to-gas as a storage medium could offset the continuing strong increases in the volatilities in power supply. The prospects for power-to-gas are favourable. Experts claim the installation of power-to-gas systems with an electricity generation of 1,000 MW by 2022 to establish an initial market. If in the time thereafter – as we expect – the demand for electricity storage media continues to rise as a result of increasing green electricity quantities and fluctuations, power-to-gas is an appropriate answer to the currently still open question as to a sustainable technical solution. [more]

Substantial changes in global economic weights over the past decades, in particular the rise of China and India, combined with major shifts on the energy supply side – the US shale revolution – have increasingly shifted the Gulf countries’ economic focus towards the Asian continent. Asia is now the GCC’s most important trade partner, both in terms of its hydrocarbon exports as well as imports of machinery, manufactured goods and food. The growing trade ties have also been accompanied by intensified bilateral investment relations. The observed shift promises to give the GCC countries better access to rapidly growing Asian retail markets, not only in energy but also other sectors such as telecommunications and Islamic finance. This should help the GCC in its ambition to diversify its economies. Migrant workers from Asia contribute significantly to economic prosperity and development in the Gulf monarchies, although the socio-economic implications stemming from the rapidly growing expatriate communities in the region will pose some challenges. [more]

Corporate bond markets in Asia have expanded rapidly. Since the global financial crisis, Asian corporates have made increasing use of bond issuance for their funding needs, complementing traditional channels such as bank lending. While the bond markets of Hong Kong, Singapore and Korea are comparatively advanced and liquid, markets in China, India, Indonesia and Thailand are still at an early stage of development. Considerable variation exists in terms of bond issuances' structural characteristics by sector, currency, issuing volume and the use of funds. Fast growth in bond markets has provided an effective source of financing for the corporate sector, but its development is far from complete. [more]

Germany pursues ambitious energy and climate policy objectives and is thus a trailblazer in these fields internationally. However, the faltering UN climate protection process shows that other countries are not following Germany's lead or are moving at a slower pace. In Germany, a barely perceptible process of de-industrialisation has already begun in energy-intensive sectors. CO₂ emissions are shifting from Germany to other countries. In order to stop the barely perceptible process of de-industrialisation and carbon leakage, Germany should either join forces with Europe to achieve faster progress and more stringent targets in international climate protection or else curb its own pace. At the very least, Germany has to seek to make its Energiewende more efficient. Moreover, energy-intensive companies are going to require exemption regimes in the future, too. [more]

The findings of our study show that in both the periods before and after the Lehman collapse higher liquidity and lower risk aversion go hand in hand with lower yield spreads between federal bonds and Länder bonds. With regard to the influence of fundamental macroeconomic and fiscal variables on the yield spread there are, however, differences between the periods before and after the Lehman collapse. Up until the Lehman collapse neither the debt level nor the relative economic output had a significant impact on the size of the yield spread. Like in the European bond market, however, the economic output and the debt levels of the Länder have been major determinants of the yield spread since 2008 – despite (implicit) joint liability of the different levels of government. [more]

German industry is showing first signs of recovery. In view of the large statistical underhang of 1.6% from the year 2012, we expect, however, that industrial production will only stagnate in the current year. In 2014, industrial activity will continue to increase (+4%). The upswing is associated with stronger growth in important foreign markets of German industrial companies, especially in the US and – to a lower extent – in China. The EMU countries will also register positive GDP growth again, so exports will give a boost to the economy. This supports e.g. the automotive industry, electrical engineering and mechanical engineering. [more]

Five years after the global financial crisis hit both the US and Europe, banks across the Atlantic are in very different shapes. US banks have returned to record profit levels, while their European peers are struggling to stay above the zero line at all. The differences are mainly driven by diverging trends in revenues, corporate lending growth and loan loss provisions all of which have developed much more favourably in America than in Europe. This may have been caused largely by three underlying factors: i) the better macroeconomic performance of the US, ii) European banks' less aggressive dealing with problematic legacy assets and their greater need to deleverage and shrink, and iii) differences in the institutional setup - in Europe at times triggering doubts over the very survival of the Monetary Union, in the US allowing the Fed to massively intervene in financial markets. As the US economic recovery gains strength and Europe emerges from the debt crisis and recession, banks face improvements on an operating level, with EU financial institutions likely to narrow but not close the gap to their US competitors. [more]

Advanced television is now incorporating more personalised, mobile and interactive elements. It will not, however, completely relinquish its original character in the process and will thus remain the primary medium. Many media companies are relying on alliances and takeovers to expedite the business model realignment associated with this transition. This means that the media market will remain extremely dynamic: there will be new players entering the market, new business models, but also takeovers and exits from the market. In such a situation long-term strategies backed by ample capital reserves are particularly promising – all the more so if they are also allied to a positively perceived brand name. Accordingly, the media market is set to undergo increasing consolidation again following a period of segmentation – albeit with a new group of players and names that are in some cases already well known from related sectors. [more]

Derivatives markets form a major part of the regulatory reform agenda. While corner-stones of the reforms have been defined, some crucial issues such as the exact definition of standardised derivative contracts, the treatment of cross-border trades and CCP access to central bank liquidity are yet to be clarified. The decrease in volumes in derivatives markets can largely be explained by trade compression. Even though there is a notable shift from dealer to CCP trades for interest rate derivatives and a less remarkable shift for the credit derivatives, the actual capacity of the clearing market is much higher. Regulatory pressure to encourage standardisation seems to have created little impetus for greater standardisation to date and the use of exchange platforms seems to remain subdued. Even though collateral practices would become more expensive for all market participants, non-financial corporations as counterparties are more likely to be affected by collateralisation obligations in the future. A few CCPs dominate the market suggesting concentration issues. [more]