ZEW Survey Among Financial Market Experts: Dark Clouds Over the German Certificate Market

A serious setback can be expected in the German certificate market if a large German or foreign issuer defaults. In this case, more than two thirds of the 205 financial market experts recently surveyed by the Centre for European Economic Research (ZEW) Mannheim, expect a massive return of certificates. In the short term and even if no issuer defaults, the financial crisis will have a negative effect on the outstanding volume of the German certificate market. On a three to five years time horizon, the experts do not expect a change in the overall outstanding volume.

During the past years, the German certificate market has grown strongly. Mainly private investors have invested their capital. At the moment, the volume of the German certificate market is 130 billion euros. The experts surveyed by ZEW expect that this positive development will now come to a halt. Especially the default of an issuer could lead to a severe setback. If an issuer defaults, it is possible that owners of the certificate suffer a complete loss, even if they have so far always been in the black because, from a legal point of view, certificates are pure debt securities. Therefore, the surveyed financial market experts expect a large-scale return of certificates in Germany, a so-called “certificate run”  in case of the default of a German or a large foreign issuer. Even though the near-default of the very small certificate issuer Bear Stearns has not seriously disrupted the German certificate market, two thirds of the experts surveyed expect that the default of an important issuer would have a lasting effect on the German certificate market.

In the short term and even if no important issuer defaults, a significant majority of survey participants also expects a negative impact of the subprime crisis on the outstanding volume of the certificate market. 43 per cent stated that the financial crisis will not influence the certificate market and only one per cent of the analysts believe that the certificate market will profit from the financial crisis. “Due to these results, the hopes of many banks to attract private investors by issuing new certificates that are especially tailored to the financial crisis were dashed”, explains ZEW financial market expert Waldemar Rotfuß.

On a three to five years time horizon and if the certificate market does not suffer any severe setback caused, for example, by the default of a large issuer, the experts surveyed do not expect a change in the overall outstanding volume. Yet this does not mean that parts of the certificate market will neither grow nor decline. The experts forecast a slight rise in the outstanding volume of bonus certificates, discount index certificates, outperformance certificates, guarantee certificates and thematic/strategy certificates or basket certificates. For classic warrants, knock-out certificates and express certificates a slight decrease is expected.

Contact

Waldemar Rotfuß, E-mail: rotfuss@zew.de