Tuesday, February 3, 2009

German banks warn of market ‘distortion’

By James Wilson in the Financial Times:

The banks behind Germany’s €800bn ($1,028bn) market in covered bonds are warning of market distortion if the government extends the guarantees it has offered to financial-sector bond issuers.

Berlin has given German banks the chance to issue three-year bonds with state guarantees in an attempt to restore confidence and keep refinancing flowing. While several banks including Commerzbank have used such guarantees, the continued turmoil in the sector has led to calls for the support to be lengthened to five years to be more effective.

Henning Rasche, president of the VDP, the association that represents Germany’s issuers of covered bonds – known as Pfandbriefe – said such a step would harm sales through unfair competition.

His warning follows other complaints that government guarantees are crowding the market for highly rated bond issuers. Last week KfW, the German development bank that is one of Europe’s biggest issuers, said public agencies faced more competition to attract investors.

“Issuers accept the inevitable distortions that government-guaranteed unsecured bank bonds create on the capital market. But a widening of the scope of such guarantees would result in an unfair disadvantage for Pfandbriefe sales,” Mr Rasche said.

Pfandbriefe and other covered bonds are highly rated, since they are backed by conservatively valued, ring-fenced pools of mortgages and other assets and are thus seen as extremely secure. Germany is the biggest source of covered bonds, with €820bn in outstanding debt. Pfandbriefe sales have already been hit by the decline in confidence in banks since the collapse of Lehman Brothers and the near-collapse of Hypo Real Estate, the German mortgage bank that is an important Pfandbriefe issuer.

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