Germany’s Green Debt a ‘Big Deal’ for World’s $68 Billion Market

(Bloomberg) -- Germany is paving the way for a green bond revolution in Europe by selling its first government-backed securities later this year.

The timing could hardly be better. The coronavirus crisis is creating a borrowing need that has never been seen before in Europe, and investors are increasingly seeking assets that meet environmental or social goals. The green nature of pandemic recovery budgets have been widely touted by Chancellor Angela Merkel's government and the European Union.

While a number of others have beaten Germany by issuing debt that directly finances projects of an environmental nature -- Poland was the first to do so in 2016 -- its status as the region's safest borrower is a major boon to a global market that has grown to $68 billion. And by planning up to 12 billion euros ($13.5 billion) of sales this year alone, its size makes a splash.

“In our green fund we will surely have a look at them,” said Ronald van Steenweghen, a money manager at Degroof Petercam Asset Management. “The EU green deal could open up a lot of interesting projects that need finance.”

Germany's plan to sell bonds that have the same coupon and maturity as existing regular bonds could also prove a model for others to follow, given its relative simplicity. The nation announced it would start by selling a 10-year bond in September, followed most likely by a five-year security in the fourth quarter.

Then 2021 will bring further sales in different maturities, anywhere from two years to 30 years, according to Tammo Diemer, co-chief at the Federal Finance Agency. The aim is presumably to build up an entire yield curve over the coming years.

So far France is the biggest sovereign green issuer globally, followed by Netherlands and Belgium. There's plenty more in the pipeline. Italy and Poland are planning sales and Austria, Spain and Sweden are all considering their first green bonds this year. In emerging markets, Kenya and Nigeria expect to and Brazil is readying measures allowing it to do so.

The risks are low for Europe's largest economy. Germany can borrow money for 30 years interest-free thanks to its long-held policy of maintaining a budget surplus, squeezing the amount of debt available for investors. While that debt brake has now been suspended because of the coronavirus, the nation's reputation as a haven and the European Central Bank's quantitative-easing program has continued to see investors pour in.

Germany's conventional 10-year yield was hovering at around minus 0.48% on Tuesday.

Merkel's 130 billion euro recovery budget, unveiled earlier this month, was hailed as the most ambitious yet to support green initiatives, such as electric car production, public transport and renewable energy. The EU is aiming to reach climate neutrality in 2050, while steps on a separate recovery fund may include jointly-backed debt by member states.

For Mizuho International's head of multi-asset strategy Peter Chatwell, the new bonds could even take over as the new “risk-free” rate in Europe, given they boast better sustainability credentials than their conventional peers. That comes as funds are trying to work out just how to factor in climate effects on the world's $31 trillion sovereign debt market.

“Green German bonds will probably be viewed as the lowest risk asset in European fixed income,” Chatwell said. “The risk-free rate just became even more risk free. This is a big deal.”

©2020 Bloomberg L.P.