The financial crisis and balance of payments developments in the euro area

Considerable and persistent current account deficits were built up in some euro-area countries prior to the financial crisis. These countries’ external debt consequently rose substantially, causing a significant increase in lenders’ funding risks.The financial crisis abruptly revealed these imbalances and risks. As the crisis escalated, negative feedback effects surfaced in many areas between the problems facing government budgets and the risks to which national banking systems were exposed, thereby sowing doubts among private investors about the sustainability of the entire external debt position of the affected countries. Of late, inflows of private capital have no longer sufficed to offset these countries’ (albeit contracting) current account deficits.

It follows that these countries are experiencing not just a loss of confidence in their public finances but also severe balance of payments problems. Many observers initially regarded the risks to the single currency area of such balance of payments difficulties as negligible and underestimated their reach. Moreover, the crisis has shown that the usual mechanisms for correcting national balance of payments imbalances are slower to take effect within the euro area than in other exchange rate systems. One reason for this, as is confirmed by empirical studies carried out by the Bundesbank, is that, in a monetary union, not only are the exchange rates between member states fixed, but the adjustment process is cushioned and staggered over time by the common monetary policy through the harmonisation of short-term interest rates and liquidity assistance measures.

This prevents an overly abrupt macroeconomic adjustment process and the considerable knock-on costs that this would have on the real economy and the financial systems of the affected countries. But as this weakens market-driven adjustment processes, it is crucial to put in place economic and fiscal policy coordination and conditionality so as to underpin the macroeconomic adjustment processes needed to help create sustainable external positions within the single currency area. In addition, the risk premiums reflected in the interest rates must not be permitted to be largely levelled out.

This requires both appropriate regulation and heightened risk awareness on the part of market participants, especially if – as in the euro area – the institutional and legal framework is still built mainly on national responsibilities. at the same time, a weakened corrective mechanism in the euro area imposes more exacting demands on member states’ homogeneity. The newly implemented macroeconomic imbalance procedure in the EU and the Fiscal Compact are steps in the right direction. However, it remains to be seen to what extent this will help to quickly detect and rectify undesirable trends in future.

The development of state government finances in Germany since 2005

In the past years, state government finances have been characterised by severe fluctuations. After state government as a whole had achieved a balanced budget, the financial and economic crisis subsequently caused the situation to deteriorate considerably in 2009. While the combined deficit has since receded significantly, state government budgets are not expected to come near to balancing until the end of the 2016 fiscal planning period.

The current fiscal situation varies greatly across the individual states. Whereas some states posted surpluses last year already, others continued to report very high deficits. Although interest payments on high levels of indebtedness played a key role in many cases, the states’ other expenditures and revenues also varied, sometimes considerably.

In order to curb government debt, including that of state government, stricter borrowing limits were constitutionally enshrined in the Basic Law in 2009. All states have to  balance their budget in structural terms starting in 2020. However, some key details of the debt brake was left to state legislatures, and the transition period set forth in the Basic Law appears to be very long for most of the states. In the meantime, following the amendment of some state constitutions, the first implementing acts have been drawn up.In most cases, however, only imprecise or unambitious milestones have been set for the minimum deficit reductions during the transitional period. As in the case of states that have not yet revised their borrowing limits, this harbours the risk that necessary consolidation measures will be put off and that it will ultimately be harder to achieve the budget targets. The later consolidation is begun, the higher the future interest burden will be, which in turn will cause a further perceptible narrowing of the scope for other expenditure. States with high starting deficits have a particularly need to act now.

It makes sense to include significant safety margins in the new constitutional borrowing limits in order to avoid short-term and potentially pro-cyclical adjustment requirements following unexpectedly unfavourable trends.

With regard to the reform of the state government revenue-sharing scheme, which is also scheduled to take effect by 2020, it appears appropriate, also given the differences between states in terms of their starting position, to increase flexibility of revenue, too, and to authorise, for instance, state-specific surcharges or discounts on joint taxes.

The importance of trade credit for corporate finance in Germany – What the financial statements statistics tell us

Trade credit is among the most important external financing instruments of non-financial corporations in Germany. This particular corporate credit market is partly an alternative to and partly a complement to short-term bank lending.

Payments received on account of orders and trade payables are the two main types of trade credit.  Payments received on account are based on historically evolved payment habits which, in economic sectors with order-based production, partly offset the burden of prefinancing and the heightened economic risk to the supplier in the case of long-term production processes. In the aggregate, this segment of trade credit, at just over 5% of total assets, accounts for only around half of what is included on the liabilities side of corporate balance sheets as trade credit.It is particularly enterprises with a high turnover of goods that use this source of funding. This makes up a major part of the short-term external funding needed to finance current assets. To some extent, however, it also helps to fund the high exposures accruing to the German economy in connection with foreign trade.

Several special analyses of the Bundesbank’s financial statements statistics show that the use of trade credit for short-term funding is associated particularly with sector-specific factors or funding requirements resulting from the relevant firms’ business models. By redistributing liquidity within the corporate sector, the trade credit chains that consequently develop make a key contribution to safeguarding the flexibility and stability of corporate financing.

Because they are grounded in the real economy, trade credits are closely linked to the business cycle. Not least, they facilitate the short-term injection of start-up funding for working capital at the beginning of a cyclical recovery. In certain industries, however, the amount of trade credit claims granted involves a long-term, non-cyclical exposure that can reach a considerable size. In order to systematically manage the associated risks, creditors need to have a professional credit and liquidity management system in place.

The use of cash and cashless payment instruments: a microeconomic analysis

Various payment instruments are available to consumers to pay for goods and services. They can choose between cash and cashless payment instruments. The Bundesbank regularly conducts surveys on this topic in order to obtain more detailed information about consumers’ payment habits. In this issue of the Monthly Report, the results of a recently completed study are presented and compared with results of a similar study from 2008.

The current study concludes that individuals use cash for 53% of total expenditures – excluding recurring payment such as rent. This makes it still the most-used payment instrument in Germany, despite a nearly 5 percentage-point decline in usage compared with 2008. Debit cards (in Germany principally the girocard) are used in 28% of payments, making them the premier cashless payment instrument; their share has gone up by nearly 3 percentage points. They are followed far behind by credit transfers and credit cards.

In principle, the significance of cashless payment instruments has risen in the past ten years, whereas the intensity of cash usage has declined. However, this is a slow but continuous process which has been evident for some years. In the short to medium term, a continued substitution of cash by cashless payment media may therefore be expected.

The increase in online shopping is likewise having an impact on payment habits. The use of cashless payment media is now virtually unavoidable in order to purchase products online which used to be purchased in bricks-and-mortar stores and paid for in cash. Internet payment procedures are the beneficiaries. In addition, payment innovations – especially contactless payment procedures using payment cards or mobile phones – could accelerate the substitution of cash.