Germany gets paid for borrowing

Would you lend someone 100 euros ($126) knowing already now that you will only get 99 euros back in two years' time? Nobody in their right mind would do that, let alone hard-nosed investors in search of profit.

Faced with such a choice, ordinary people would likely prefer to stuff the money into their mattresses, and buy some ice cream for the odd euro.

However, Andrew Bosomworth is barred from this type of investment strategy. He is portfolio manager at Pimco Deutschland - an asset management firm investing about 1.8 trillion euros each year for German insurance company Allianz.

"Institutional investors cannot just stuff money in mattresses," he told DW, adding that for Pimco, capital belongs in the banks.

However, Bosomworth admitted that over the short term, leaving capital in banks wasn't a sound investment either, as interest rates offered by premium-rated financial institutions were already in negative territory - meaning that investors would have to pay for placing money there.

"Banks with a lower credit rating pay zero interest, while those with negative ratings actually pay at least a small amount," he said.

Capital must breed

The current investment situation is further complicated by a general lack of trust among financial institutions, described by Bosomworth as "competitors' risk." This is why he typically demands collateral for his investment, he said, which is often given in the form of government bonds from premium borrowers such as Germany.

Moreover, institutional investors are normally bound by a number of legislated and company-specific rules, stipulating in which asset categories they are allowed to invest how much capital.

Chris-Oliver Schickentanz, chief investment strategist with Commerzbank, told DW that for institutional investors, it was actually illegal to "stash money in wardrobes."

"There is a maximum amount of capital which can be kept as cash. Once this is exceeded, investors are virtually forced to invest," he said.

However, where to invest is a question of heightened importance for institutional investors these days, because - unlike their colleagues from hedgefunds, and other high-risk investors - institutional investors are barred from placing funds in lucrative yet speculative financial products.

"This applies to insurance companies and pensions funds, as well as to mutual funds, which are all banned from riskier asset classes and, therefore, can mainly only invest in prime sovereign debt," Schickentanz told DW.

Illogical investment logic

Unfortunately, these types of investment opportunities have become scarce in the current sovereign debt crisis, which explains why institutional investors are jostling to buy treasury bills from the safe haven of Germany.

In a German bond auction earlier this year, Berlin was for the first time able to borrow 3.9 billion euros for negative interest of -0.01 percent. Pimco's Andrew Bosomworth told DW that investors actually paid Germany for accepting capital - a move he described as "not logical, but increasingly made at the moment." 

In May, for example, Germany was able to place two-year debt bills worth 4.6 billion euros in bond markets for zero interest.

However, what might be understandable in the case of Germany, the Netherlands and Finland - all enjoying sterling credit ratings - meanwhile has begun to spread to less creditworthy nations.

Due to a lack of secure investments, lower bond yields reflecting higher demand were enjoyed by France last week and Belgium this week.

"Interest rates at or around 0 percent are currently being enjoyed by a total of 10 industrialized countries with refinancing needs in the range of 23 trillion US dollars," said Chris-Oliver Schickentanz, adding that refinancing was cheap notably for the short term.

Divided Europe

However, while capital is being thrown at some countries, investors are proving especially frugal with debt-laden nations such as Spain and Italy, which labor under soaring borrowing costs.

Andrew Bosomworth said that financial markets were "dividing the eurozone" as it doesn't believe the 17-nation currency area "was working."

"Politicians need to come up with answers as to how they want to make sure that the eurozone develops in a sustainable way in the future," he told DW.

The Pimco asset manager said he saw only two possibilities for achieving this: Either the eurozone shrinks to embrace only economically strong nations such as Germany, Austria, the Netherlands and Finland, or a stronger union is created.

This union would need to be legitimized through a democratic vote, which would require a common finance minister as well as permanent transfer of capital from rich to poor eurozone members, he added.

The current turmoil in financial markets, he said, would only increase pressure on politicians to move toward such a choice.

Author: Andreas Becker / uhe

Editor: Sonya Diehn