Market Analysis

European defense stocks experienced a decline on Monday following reports that Berlin plans to reduce its military aid to Ukraine due to budgetary constraints.

According to the Frankfurter Allgemeine Zeitung (FAZ), the German government has instituted a freeze on new military assistance to Ukraine. While previously approved aid will proceed as planned, any new funding requests will be rejected.

Shares of major defense contractors, including Rheinmetall (ETR), BAE Systems (LON), Saab (ST), Thales (EPA), Leonardo (LON:0ONG), and Dassault Aviation (EPA), fell between 1.2% and 6.2% in early trading.

This move aligns with a broader strategy within Germany's ruling coalition to reduce government spending. The report, citing confidential documents and insider sources, suggests that the freeze on new aid is effective immediately.

German Finance Minister Christian Lindner communicated in a letter to the defense ministry that future support for Ukraine would be funded through frozen Russian assets rather than the federal budget. This marks a shift in Germany's approach to supporting Ukraine amidst its ongoing conflict with Russia.

This decision follows an international agreement reached in June among G7 countries, which aims to use approximately $300 billion in immobilized Russian assets to secure a $50 billion loan for Ukraine. However, the details of this plan are still under negotiation, with technical discussions expected to continue for several months.

Germany, a key supplier of military aid to Kyiv, has been under increasing scrutiny. Last month, the ruling coalition, composed of the Social Democrats, the Greens, and the Liberals, approved a draft budget for 2025 that includes significant cuts to future aid for Ukraine.

Lindner noted that Ukraine would need to rely more on European sources and the frozen Russian assets for future funding. However, the timeline and practicality of accessing these funds remain uncertain.

The decision to limit aid has intensified tensions within the German coalition government, which has been struggling with internal disputes over issues such as the budget and welfare policies.

The discord within the coalition was further highlighted by recent remarks from Green Party leader and Economy Minister Robert Habeck, who announced his intention to run for chancellor in the 2025 federal elections. Habeck's comments underscore the challenges the current government faces in maintaining unity.

Paraphrasing text from "Reuters" all rights reserved by the original author.