TheChek News Flow

Plan to transform holdings will limit share of bonds with high carbon footprint bank accepts as collateral

The European Central Bank will shift the corporate bonds it owns and accepts as collateral away from the most carbon-intensive companies, going further than most big rate-setting authorities but disappointing activists eager to see stronger measures.

Announcing plans to “tilt” its €386bn portfolio of corporate bonds away from companies with “a poorer climate performance”, the ECB said it “aims to gradually decarbonise its corporate bond holdings” in line with the 2015 Paris Agreement to limit global warming.

The central bank said it would also limit the share of non-financial corporate bonds with a “high carbon footprint” it accepts as collateral from individual counterparties, while requiring climate risk disclosure to hit certain levels before an asset or loan is accepted as collateral.

ECB president Christine Lagarde, who has made fighting climate change a key focus of her leadership, said: “Within our mandate, we are taking further concrete steps to incorporate climate change into our monetary policy operations.”

She added “there will be more steps” in future to align the ECB’s activities with the Paris Agreement to limit global warming to 1.5C since pre-industrial times. Temperatures have already risen at least 1.1C.

The plan is more expansive than those announced by the Bank of England, which said last year it would refocus its corporate bond holdings on greener companies, and Sweden’s Riksbank, which said last week it would only buy the bonds of companies that disclosed their climate risks sufficiently.

However, campaigners expressed disappointment that the ECB had not gone further. Greenpeace finance expert Mauricio Vargas said the measures announced on Monday were “overdue”, adding that the ECB “should actively sell the bonds of companies, like the big fossil fuel groups, that are not aligned with the goals of the Paris Agreement”.

Stanislas Jourdan, executive director of campaign group Positive Money Europe, said he was “quite encouraged” by the ECB’s planned carbon-based limits on its collateral system, which he said “signals a move towards a near-exclusion of certain high carbon assets”.

The ECB first announced plans to shift its corporate bond purchases and collateral rules away from heavy carbon-emitting companies last year when it presented the results of a strategy review. It has been criticised by some observers for focusing on green issues when they say it should have concentrated more on preventing inflation in the eurozone from hitting a high of more than quadruple its 2 per cent target.

The ECB on Monday defended the measures, however, saying they “aim to better take into account climate-related financial risk in the eurosystem balance sheet and, with reference to our secondary objective, support the green transition of the economy in line with the EU’s climate neutrality objectives”.

The shift in its corporate bond portfolio will come into force in October and will only affect how it reinvests the proceeds of maturing bonds it already owns after it stopped expanding its balance sheet last week.

Corporate bonds make up less than 8 per cent of the overall €4.95tn of assets the ECB has bought under its quantitative easing policy, most of which are sovereign bonds.

The carbon-based collateral limits on individual counterparties will come into force “before the end of 2024” and apply only to the assets issued by non-financial companies, which make up less than 3 per cent of the total collateral held by the ECB, after valuation adjustments, at the end of March.

The ECB added that it would consider climate risks when adjusting the value of corporate bonds using accounting “haircuts” from this year. It will also push rating agencies to be more transparent and ambitious in how they assess climate risk at the companies they analyse.

The new disclosure requirements for assets to qualify as collateral will only come into effect once the EU’s corporate sustainability reporting directive is fully implemented as expected in 2026, it said.

Soaring energy prices and trading disruption push balance €1bn into the red for May

Germany’s political and business leaders warned that the country was facing its biggest economic crisis for decades as soaring energy prices and disruptions to trade pushed the country into a monthly trade deficit in goods for the first time in more than 30 years.

The rise in energy prices increased the cost of imports to Europe’s largest economy in May, while global trade disruption weighed down exports, causing a $1bn deficit — the first since 1991. The figures contrasted with years in which Germany’s manufacturing exports drove the country’s growth and made it the powerhouse of the EU economy.

Warning on Monday that Germany faced a “historic challenge”, chancellor Olaf Scholz added that “the crisis won’t pass in a few months” because Russia’s war in Ukraine “has changed everything, and supply chains are still disrupted by the pandemic”.

The sanctions imposed on Moscow by western countries have also hit trade, along with China’s coronavirus lockdowns, squeezing demand for goods from Germany’s export-focused economy.

Scholz was speaking after talks with trade union leaders, economists and employers’ groups aimed at tackling the cost of living crisis.

Rainer Dulger, head of the Confederation of German Employers’ Associations, said after Monday’s meeting held by Scholz that Germany was facing the “toughest economic and social crisis since reunification”.

“Difficult years lie ahead of us,” he added. “We can no longer take for granted the continuous economic growth that we experienced before the Covid-19 pandemic and the Ukraine war.”

Imports increased 2.7 per cent to €126.7bn from April to May while month-on-month exports fell 0.5 per cent to €125.8bn, according to data released on Monday by the federal statistical agency.

“Germany’s trade surplus has now evaporated, thanks mainly to soaring

imports, offsetting otherwise decent momentum in exports,” said Claus Vistesen, an economist at Pantheon Macroeconomics. He added that he

expected the country to continue running a trade deficit over the summer.

May’s fall in overall German exports was partly because of a 2.8 per cent monthly drop in exports to other EU countries, while imports from those countries increased 2.5 per cent. Exports to the US increased 5.7 per cent and those to China were up 0.5 per cent, but exports to the UK fell 2.5 per cent.

“In the past. Germany could always rely on strong exports to revive the economy and today’s numbers show the trade balance will not return as a positive element for growth for at least the next couple of years,” said Carsten Brzeski, head of macro research at ING.

Economists expect high energy prices and weak exports to hit German growth this year. ING is forecasting German gross domestic product will shrink in the second quarter and Brzeski said: “There is a high probability that Germany and the rest of the euro area will enter recession this year.”

Dulger said companies “don’t know which fire to put out first”. He said there was a “shortage of skilled workers, material and staff, and supply chains are in tatters. It will remain a challenge to keep firms open.”

Prices of German imports rose more than 30 per cent in the year to May — reflecting soaring energy and commodity prices — while export prices rose almost 16 per cent. While trade data is reported on a nominal basis, the data is adjusted for inflation when calculating GDP.

German exports to Russia recovered some of their recent falls, rising almost 30 per cent from the previous month to €1bn, but they remain less than half the level of a year ago. German imports from Russia fell almost 10 per cent to €3.3bn. Moscow has cut the supply of natural gas to Germany in recent weeks, raising fears of shortages that could force some industrial production to be shut down.

Many German companies announced they were severing ties with Russia after the EU imposed sanctions on thousands of Russian individuals and businesses. Brussels plans to ban EU imports of Russian oil as part of a sixth package of sanctions against Moscow.

There has been a similar deterioration in the trade balance of the overall eurozone, which had a trade deficit in goods of €32.4bn in April, a reversal from a surplus of €14.9bn a year earlier. Eurozone trade figures for May are due to be released on July 15.

Nagel’s comments reflect concerns over plan to counter divergence in eurozone borrowing costs

The head of Germany’s Bundesbank has warned it will be “virtually impossible” to decide if a divergence of borrowing costs between eurozone countries is justified, arguing it would be “fatal” for governments to rely on the European Central Bank’s support.

Joachim Nagel’s comments in a speech on Monday were the first sign of serious disagreement at the ECB over its plan to develop a new asset purchase tool to counter any “unwarranted” surge in the bond yields of more vulnerable countries once it starts raising interest rates. 

Nagel said “it would be fatal if governments were to assume that the eurosystem will ultimately be ready to assure favourable financing terms for the member states”, and that rate-setters could find themselves in “dire straits” legally over the tool.

The comments by Germany’s central bank chief reflect rising concern among more stable northern European countries that the ECB risks overstepping its mark to keep bond yields low for more indebted southern member-states. Some policymakers worry that if governments are not encouraged to rein in spending it could undermine the ECB’s effort to tackle high inflation.

Since the ECB announced plans to start raising rates this month, bond yields of weaker countries like Italy have soared faster than those for more stable countries like Germany, prompting it to accelerate work on a “new anti-fragmentation instrument”. 

It is against EU law for the central bank to finance governments and Nagel said the ECB would have to put enough safeguards in place to avoid straying into “monetary financing”.

The central bank has defended its earlier bond-buying against numerous legal challenges in Germany, but this could be harder now without the justification of fighting excessively low inflation. 

The ECB worries that a bond market panic could push up weaker countries’ borrowing costs to a level that tips them into a financial crisis. It believes a new tool to counter this risk is justified as it would preserve its ability to transmit monetary policy evenly to all 19 members of the single currency bloc.

The difference, or spread, between German 10-year government borrowing costs and those of Italy has doubled from 1 percentage point a year ago to around 2 percentage points in recent weeks.

Nagel, however, cautioned against “using monetary policy instruments to limit risk premia, as it is virtually impossible to establish for sure whether or not a widened spread is fundamentally justified”.

“One can easily find oneself in dire straits,” he said, adding “it is clear that unusual monetary policy measures to combat fragmentation can be justified only in exceptional circumstances and under narrowly defined conditions”.

Since Nagel took over at the Bundesbank at the start of the year, he has become increasingly concerned as eurozone inflation has shot up to a record level of 8.6 per cent. He said the ECB, of which he is a member of the governing council, should “concentrate all of our efforts on combating this high level of inflation”.

The German central banker set out a number of parameters for any new instrument by the ECB, including that it be “strictly temporary” and be designed in a way that it did not hamper its efforts to bring inflation back down to its target. He added that it should provide governments with “sufficient incentives” to achieve sustainable debt levels.

Such a tool should be “predicated on comprehensive and regular analyses covering a broad set of indicators” and only be used if interest rate spreads are “the result of excesses in financial markets”, he added.

Report on Shireen Abu Akleh’s death comes a week before Joe Biden’s Middle East trip

The US state department said on Monday that unintentional Israeli gunfire “was likely responsible for the death” of a prominent Palestinian-American journalist shot dead in the occupied West Bank earlier this year.

Shireen Abu Akleh, who worked for the Al Jazeera network and was a household name across the Middle East, was killed while covering an Israeli military raid in Jenin on May 11.

Palestinian officials have blamed Israeli soldiers for her death, while Al Jazeera accused Israel of “deliberately targeting and killing our colleague”. Israeli officials have rejected any suggestion Abu Akleh was killed deliberately, and said she could have been hit by either Palestinian or Israeli fire during the shootout.

On Monday, the state department said that after reviewing Israeli and Palestinian investigations into the shooting, the US Security co-ordinator (USSC) had concluded that “gunfire from IDF (Israel Defense Forces) positions was likely responsible for the death of Shireen Abu Akleh”.

However, it added that there was “no reason to believe that this was intentional but rather the result of tragic circumstances during an IDF-led military operation against factions of Palestinian Islamic Jihad . . . which followed a series of terrorist attacks in Israel”.

Palestinian officials last week handed the bullet that killed Abu Akleh to US officials, paving the way for its examination this weekend.

However, the state department said that despite an “extremely detailed forensic analysis”, it had not been possible to reach a “definitive conclusion” on the bullet’s origin as it was too badly damaged.

The announcement drew a furious response from Abu Akleh’s family, which expressed incredulity that the probe had not been able to determine the origin of the bullet. They also took issue with the conclusion that the killing — which sparked outrage around the world and cast a spotlight on Israeli operations in the West Bank — had been an accident.

“[The] pronouncement that the killing was not intentional but rather the result of a purported Israeli counter-terrorism raid gone wrong . . . is frankly insulting to Shireen’s memory and ignores the history and context of the brutal and violent nature of what is now the longest military occupation in modern history,” the family wrote in a statement.

The IDF said it had ordered a continuation of the probe into the incident “using all available means”, and that a decision on whether to initiate a criminal investigation would be made once its probe was complete.

The state department’s announcement — which follows a statement last month by the UN human rights office that the shot that killed Abu Akleh came from the direction of Israeli forces — comes a week before US President Joe Biden is due to visit Israel as part of a trip to the Middle East.

The Biden administration has faced pressure from US lawmakers to bring about a conclusion to the investigation before his arrival in Israel.

Last month, 24 Democratic senators led by Maryland Senator Chris Van Hollen sent a letter to the Biden administration urging the US to get involved in the investigation.

The state department said that it would “remain engaged with Israel and the Palestinian Authority on next steps” in the case, and that it “urge[d] accountability”.

Austrian investor also to acquire 20 per cent stake in struggling real estate group

Austrian property magnate Cevdet Caner has been named as chief executive of Aggregate Holdings, in a surprise move that will also see him take a 20 per cent stake in the company linked to allegations facing Adler, one of Germany’s biggest real estate groups.

Luxembourg-based Aggregate was once the largest shareholder in Adler, a real estate group that owns 27,500 flats in north and western Germany.

Adler has been under intense scrutiny since short-selling group Viceroy Research last year published a report accusing the group of widespread fraud and inappropriate related-party transactions connected to Aggregate and Caner. Caner, Adler and Aggregate have denied all the allegations.

A forensic audit by KPMG into the allegations commissioned by Adler found extensive evidence that Caner had significant involvement in strategic decisions and the recruitment of executives despite having no formal role at Adler.

The investigation also uncovered that Caner was paid €12.6mn for undocumented “advisory services” in two M&A transactions, while Adler also bought some of Aggregate’s bonds in an undisclosed transaction. Adler said that the KPMG investigation had found no evidence of fraud.

The appointment of Caner as CEO of Aggregate comes as rising interest rates deepen the challenges for the indebted group.

In a statement Caner said that he was “excited to lead the planning and implementation of the next stage of Aggregate’s strategy.”

Until the deal with Caner, Aggregate was entirely owned by its founder Günther Walcher. Aggregate, which remains a significant shareholder in Adler, did not provide any details of the transaction with Caner.

Caner, who presided over Germany’s second-largest property group bankruptcy when his Level One group failed in 2008, has so far been an adviser working “on a deal-by-deal basis on matters of sourcing, transactions and financing”, Aggregate said in a statement.

At the end of last year, Aggregate had €4.5bn of net debt, and its bonds are trading at around a third of their face value.

Walcher said on Monday that with “the major disruptions in global markets set to continue, there will be tremendous opportunities in the European real estate sector.”

Former Deutsche Bank executive Michael Cohrs, who headed the lender’s investment bank until 2010, and Luciano Gabriel, chair of PSP Swiss Property, will join a new advisory board that is designed to give Aggregate “constant access to world-class strategic advice.”

Shares in Adler have fallen by more than 80 per cent over the past 12 months, a slide accelerated after KPMG in February refused to sign off on the property developer’s accounts and in May ditched the group as a client.

Aggregate’s stake in Adler fell to 6.1 per cent in February after the remainder of its holding, which was pledged as collateral for a €250mn loan, was seized after it failed to service a margin call.

Adler chair Stefan Kirsten told Börsen-Zeitung in an interview last week that the wind down of the company was one option that was being explored.

Disruption caused by the loss of Russian gas supplies is weighing heavily on the Düsseldorf-based group

Two years ago, Berlin responded to Lufthansa’s “existential” emergency with a €9bn bailout. German chancellor Olaf Scholz is now dusting down the same playbook, according to weekend reports. That is a measure of the pain Moscow’s supply squeeze is inflicting on Uniper, Germany’s largest buyer of Russian gas.

Düsseldorf-based Uniper has 200 terawatt hours of long-term supply contracts with Russia, but since mid-June it has received only 40 per cent of what was due. Forced to cover the supply shortfall in the spot market, the business — spun out of Eon in 2016 — is losing about €35mn a day, according to Bernstein. Its cash is draining fast though it has yet to draw on a €2bn credit facility agreed with the state-owned KfW bank.

This is unsustainable; clients will be obliged to pick up the extra costs. But the government risks being sued by angry customers if it allows suppliers to unilaterally reprice contracts. It is considering sharing the pain across all energy users.

Imposing a special levy would probably require new legislation, implying significant delays. Even if it could be rushed through by July 8, the last day that Germany’s parliament sits, Uniper would have racked up losses of €870mn since mid-June. Compare that with Uniper’s February forecast of at least €1bn of 2022 ebit, although it is less than half the €2bn of market value lost since Russia started cutting supplies at that time.

Other utilities have suffered more modestly. RWE’s Russian gas contracts are less than 2 per cent of Uniper’s, suggesting potential losses of just €17mn by mid-July. While Eon itself has minimal exposure, Finland’s Fortum acquired Eon’s 47 per cent stake in 2018, and later upped its holding to 78 per cent. Forced to provide its own €8bn credit facility in January, its acquisition has proved a costly headache.

Uniper’s travails make a mockery of its name, a portmanteau of “unique” and “performance”. But there will be nothing exclusive about the disruption caused by the loss of Russian gas supplies. Germany’s gas consumption has dropped 15 per cent in the first five months of this year, but more than half of that can be attributed to mild temperatures.

When the time comes for a listing, a pricing discount would be needed to attract investors to Ant

China would have held the world record for the biggest initial public offering if Ant group had listed in November 2020. At the time, the financial services business planned to raise $37bn, valuing it at about $315bn. Alibaba’s payments affiliate may never get back to that valuation. But it still holds the key to stemming outflows from Chinese stocks.

Conflicting reports on whether an Ant listing will go ahead have triggered wild swings in Alibaba’s US-listed shares in the past two months. China’s regulator denied stories it has started discussions on reviving the transaction.

The volatility brings back memories of 2020, when the cancellation of the Ant listing marked the beginning of a two-year crackdown on the tech sector and sharp sell-off in stocks. Hong Kong listed shares of Alibaba have nearly halved in the past year. At 15 times forward earnings, they trade lower than local peers also targeted by Beijing’s crackdowns, such as Tencent.

Ant’s valuation will now be nowhere near its previously expected total of $315bn in 2020, which implied a multiple of 30 times on a forward earnings basis. Since then, the global tech sell-off has slashed valuations, including that of US peer PayPal, whose share price has also collapsed in the past year, now trading on 18 times earnings.

For Alibaba, a listing in China had been one of the few options left to give its floundering share price a boost. New lockdowns and more Covid outbreaks in China can only hurt the outlook for the ecommerce giant. A listing of Ant would have helped, given it holds a stake in the company of about a third.

When the time comes for a listing, a pricing discount would be needed to attract investors to Ant. The abrupt scrapping of the listing two years ago has changed forever the way investors view the regulatory risks for Chinese stocks. But the symbolic boost the listing would give to Chinese equities would make a lower price bearable.