Reuters logo
UPDATE 2-Germany tiptoes into new territory with federal-regional bond
June 20, 2013 / 4:59 PM / 4 years ago

UPDATE 2-Germany tiptoes into new territory with federal-regional bond

* Debt agency hopes to issue Deutschland-Bond within weeks

* Says not a template for joint euro zone bonds

* Ten states to participate; bond should cut their debt costs

* Bond rated AAA by Fitch, but not underwritten by Berlin

By Eva Kuehnen

FRANKFURT, June 20 (Reuters) - Germany’s triple-A rated government is cautiously entering new territory by clubbing together with ten of its regions for a new bond issue to bring down their borrowing costs, although it will only underwrite a fraction of the deal.

The country’s debt agency announced on Thursday the issuance of up to 3 billion euros ($4 billion) of the joint Deutschland-Bond within the coming weeks, potentially opening the door to a new system of financing for Germany’s states, some of which are struggling with high debt loads or economic problems.

Yet analysts said the fact the government was taking just a 13.5 percent stake in the issuance, prompting six states to decline to join the venture, underscored how entrenched its opposition was to joint liability, be it within Germany or the broader euro zone in the form of hotly disputed euro bonds.

Of the five parties sharing power in Germany’s parliament, the Greens are the only ones to bank on joint euro bonds in their manifesto for the country’s election in September.

At issue is what would happen if one of the participating parties defaulted.

This is less of a factor in Germany which is politically and fiscally tightly connected to its regions, and implicit guarantee mechanisms have led Fitch to say it will give the Deutschland-Bond its top AAA-rating.

Without further integration in Europe to a similar level, risks for the stronger countries having to bankroll the weaker ones persist.

After a year of negotiations, the German deal ended up weaker than some regions had initially hoped for.

“If it is not even in Germany possible to establish joint liability between the federal government and the regions, how high must the hurdle be to get this done on a European level?” said Christoph Rieger, head of interest rate strategy at Commerzbank.

“Joint euro bonds with joint liability have now become even less likely, because this example shows that such a joint liability is not possible.”

The richer regions, such as Bavaria and Baden-Wuerttemberg, stayed out of the deal, recognising they might get better rates going it alone. But it will help others save some money.

While the federal government has seen its borrowing costs fall to record lows during the euro zone crisis, several of Germany’s 16 states such as highly-indebted Berlin pay much higher rates.

The participating states have around 63 billion euros of financing to raise this year, with at least 30 billion of that still left on the table.

Regions normally borrow individually in capital markets, or in conjunction with other regions through “joint-Laender” bonds.


No ratings other than Fitch’s are planned for the Deutschland-Bond, and the deal is not expected to have an impact on Germany’s sovereign rating.

A 5-year issue is expected to price 40 to 47 basis points over Bunds, which would be 5 to 10 basis points below the “joint-Laender” bonds, said Commerzbank, one of five banks mandated to launch the bond.

Moody’s calculated in a note from last year that North Rhine-Westphalia, for example, could save around 380 million euros from a 30-basis point reduction in rates on all its outstanding debt.

North Rhine-Westphalia has a 20 percent stake in the deal.

Standard & Poor’s declined to comment on Thursday, but referred to a statement made last year in which it said the bond would “have no implications for either the federal government’s creditworthiness or that of the participating states”, because the issuance amounts and interest savings were unlikely to materially alter their budgetary performances.

S&P also said that such ‘Huckepack’ (piggy back) bonds did not signify a change in the German government’s opposition to joint euro bonds.

“The federal government’s cost, in the form of an implicit interest rate subsidy (is) ... moderate. We consider that such costs for the federal government should be significantly larger in the case of Eurobonds,” it said.

German debt agency chief Tammo Diemer also said the Deutschland-Bond was not a template for joint euro bonds.

“This gives particular smaller regions access to an investor base they otherwise would not have,” Diemer said.

The debt agency said it had spoken to asset managers in Frankfurt, London and other European cities as well as to investors in Asia who had signalled their interest, as the bond is expected to offer a premium over federal Bunds.

Barclays, Commerzbank, Deutsche Bank, DZ Bank, and HSBC have been mandated to place the bond.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below