Despite offering twice as much liquidity to corporates as everyone else, Germany has extended fewer state-backed coronavirus emergency loans than any other big economy in Europe.
France, Spain, the UK and Italy are ahead of it in this regard. Indeed, French state development bank BPI had agreed state-backed coronavirus loans of more than €100 billion by mid-summer.
By contrast, Germany’s coronavirus loans programme, managed primarily by BPI equivalent KfW, had inked less than half that number by then, despite the much bigger size of the German economy.
We thought the numbers would be much higher and we are happy that they are not that high
– Lutz-Christian Funke, KfW
Of the €756 billion in new state-backed coronavirus loans that Berlin pledged in March – about twice as much as any other European state – only 5% was committed by the end of June, according to end-of-June figures compiled by Brussels think tank Bruegel and the Peterson Institute.
By then, Italy had reached about 17% of its commitment, like France, of €300 billion. The UK had extended 18% of its €330 billion scheme. Spain, meanwhile, had distributed almost half of its €183 billion programme.
What conclusions should be drawn from this? Is it because state support was so unambiguous in Germany that business and financial confidence remained that much stronger? Or was it down to built-in disincentives to the programme’s use and the lack of operational capacity at KfW, which unlike the other schemes provides most of the liquidity rather than a guarantee.
Maybe it was due to inefficiencies and risk aversion among Germany’s struggling private banks? Commercial banks, after all, have to credit check all but the biggest loans, while also taking between 10% and 20% of the risk for all but the smallest ones.
Germany’s economic contraction of 6% is better than that in in France and Italy (-11%), but it is still an extreme recession.
Source: KfW Photo
“We thought the numbers would be much higher and we are happy that they are not that high,” says Lutz-Christian Funke, executive director at KfW.
He says that’s true, too, of the “quick loans” programme for smaller business, introduced slightly later than than overall scheme, and which did away with any need for a credit assessment by KfW or the relationship bank. Quick-loan volumes had only reached about 10% of the total, less than €5 billion, by early August.
KfW and the commercial banks that distribute and assess its loans are understandably keen to argue this has nothing to do with them. They say the reason is the healthier state of German businesses going into the crisis: albeit with the important exception of some car-parts makers, who were in such trouble in 2019 they wouldn’t have been able to access KfW coronavirus loans at all.
Germany’s kurzarbeit programme, whereby the state subsidises staff on reduced hours, is regarded as something of a gold standard for such schemes. It has helped firms stay liquid without resorting to state-backed borrowing.
Despite initial worries that KfW would not have the operational capacity to ramp up its lending to the volumes the government had promised, Funke says the state bank could turn its hand quickly to the new lending programme.
As a long-established lender, it only needed to change some elements of its existing production – including shifting more of the credit-checking role to banks – rather than setting up a new process. KfW’s UK equivalent, the British Business Bank, for example, is far newer and smaller.
The extraordinarily liquid state of the German banking sector, pre-coronavirus, is another reason why so few companies needed to go to KfW, according to Funke, not least as so many companies could draw on revolving credit facilities.
Had banks’ risk aversion been a problem, he adds, companies’ management or their staff representatives would have been much more vocal in complaining about it, including to KfW.
But perhaps the cost of the KfW scheme – 3% for quick loans or between about 1% and 2% for the rest – is a reason why take-up has been proportionately much higher elsewhere, in particular in Switzerland.
The Swiss economy and its Mittelstand sector are arguably closer to Germany than Italy or Spain, even France. However, Switzerland’s state-guaranteed coronavirus loans are free for smaller firms and only cost 0.5% for medium-sized ones.
KfW’s top 26 applicants accounted for €16 billion of its coronavirus loans by early August. The European Central Bank’s actions – combined with the wider German fiscal response, including tax deferrals and kurzarbeit – have helped keep capital markets open for healthier large corporations, and at a cheaper rate than they’d pay at KfW: particularly given Germany’s relatively strong sovereign credit rating.
For weaker medium-sized firms in Germany, KfW funding at about 2% is still cheaper than the 5% or so those firms would pay privately, bankers say. But in France, for example, the rate for medium-sized borrowers in its state-guaranteed loans programme only rises to 2% in the fourth year.
Meanwhile, applicants to the French and German schemes face similar bans on dividends, although it is less clear that French firms have to follow the same rules on management pay and bonuses as their German peers.
Restrictions around both pay and dividends have deterred potential applicants from using the KfW scheme, German bankers say, as it adds to the stigma of applying. This may be exacerbated in Germany by greater discomfort generally at the idea of central-state interventions in the private sector.
“Taking a KfW loan is not a sign of strength,” notes one Frankfurt-based corporate banker.