Investors revise view of Germany as a safe haven | Business| Economy and finance news from a German perspective | DW | 14.06.2012
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Investors revise view of Germany as a safe haven

Due to its robust economy, debt issued by Germany is seen as a safe bet by investors seeking stability in the current eurozone financial crisis. But the tide seems to be slowly turning on Germany's safe-haven image.

German investment firm Pimco reduced the number of German government bonds in its portfolio because of low yields and rising debt worries, the leading German asset manager announced Wednesday.

"Germany is losing quality due to the increasing conditional liabilities that are piling up on the [federal government]," Andrew Bosomworth, head of Pimco portfolio management in Germany, told Reuters news agency.

Bosomworth attributed the loss in quality to the enormous burden likely facing the national budget from the billions of euros guaranteed by Germany under the EU rescue fund as well as other losses that might emerge if the eurozone debt crisis were to worsen.

Preferring safety over yield in its investment decisions, Pimco said it had started buying government bonds issued by the United Kingdom, Australia, Brazil and South Africa.

Pimco's strategy is understandable, says Wilhelm Hankel, formerly president of German regional lender Helaba and a well-known euroskeptic, saying that German leaders had ensured the country's fate was inextricably linked with the euro.

That automatically means that if the euro is in trouble, Germany is in trouble too, Hankel told DW.

Negative profits

Madrid stock exchange screen

Germany pays 1.5 percent interests on its debt, Spain almost 7 percent

In addition to safety concerns, Pimco mentioned low yields as a second reason why it would be shunning German sovereign debt.

Yields on 10-year German government bonds are as low as 1.5 percent these days, which - seen against the backdrop of about 2.4 percent inflation in the eurozone - means that investors actually lose money.

However, demand for German debt continues to be strong, with bond auctions recently persistently overwritten as investors seek a safe haven for their capital in times of crisis.

But Hankel said the view that German bonds were a safe investment was gradually changing and that Pimco was merely anticipating developments. Demand for German government bonds would shrink substantially in the future, he predicted.

Higher interests

Economists say that Pimco's investment shift won't adversely affect Germany's creditworthiness among international ratings agencies.

Hankel, on the other hand, said the move heralded the beginning of the end of the low-debt era for Germany. Instead, the government would start having to pay much higher interest than the recent record-low of 1.0 percent.

In addition, he said, interest on German bonds could actually spike dramatically, if Berlin were to agree to the introduction of Eurobonds, which some European countries have vetted as a possible remedy to the financial crisis.

Hankel said eurobonds would collectivize the sovereign debts of eurozone countries, thus leading to higher borrowing costs for Germany, too.

But Hankel was skeptical that eurobonds would even sell with a downward spiral of the euro crisis, seeing as investors have already begun to consider German debt too risky.

Author: Dirk Kaufmann/uhe
Editor: Nancy Isenson