Hamish McRae: Cheaper borrowing boot now on the German foot

 

Outlook Across the Channel, the evidence of recession is mounting, with even the German economy heading towards this, if the latest Ifo and purchasing managers' surveys prove correct. Both have been falling in the past couple of months, and would be consistent with a slowly shrinking economy. This is despite the fact German companies can still borrow at very competitive rates of interest.

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One of the great unfair features of the eurozone at the moment is that the nationality of a company has a profound effect of the cost of its capital.

Take two corporations, one German, the other Spanish. On paper they might appear identical: the same size, the same industry, the same capital ratios, the same profits and so on. But as you can see from the right-hand graph, a top-ranked German company seeking a five-year loan would expect to pay around 3.5 per cent while a Spanish counterpart would be paying close to 6 per cent. A French company would be somewhere in between, but closer to the German one.

So what is happening is that, quite aside from the burden of weaker domestic market conditions, firms in those weaker countries have to cope with higher financing costs.

There are a couple of obvious reasons for this. One is the higher cost of funding for Spanish banks vis-à-vis German ones, because people want to hold "German euros" rather than Spanish or Italian ones, just in case the eurozone were to break up. The other is the greater perceived risk facing the business community in the peripheral economies.

But if this seems unfair, and it is, consider this. Back in 2003-6, when Spanish companies went on a great borrowing spree (including the highly leveraged £16bn takeover of BAA), they could borrow even more cheaply than German companies. The boot is now on the other foot.

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