As many as 11 of Germany’s 16 states including Berlin and Saarland are lining up for a first joint bond sale with the federal government, a Bloomberg poll of the regional administrations shows.
States favorable to selling a common bond -- dubbed Deutschland Bond -- see savings in a sale even after the government balked at sharing liability, officials said. As the regional administrations and the government plan next year’s budgets, some cross-party support has emerged for the sale.
The Saarland, led by Chancellor Angela Merkel’s Christian Democrats in coalition with the Social Democrats, expects savings over stand-alone sales, Stienke Kalbfuss, the state’s Finance Ministry spokeswoman, said in a telephone interview yesterday. “It’s not a political question, we expect to save money,” said Kalbfuss.
Germany’s first common federal-state bond is drawing support as regional governments mull how to meet the euro’s fiscal compact rules after their share of the nation’s 1.94 trillion euro ($2.6 trillion) debt rose to 30 percent this year. Other states co-run by the Social Democrats, including Baden-Wuerttemberg and Lower Saxony, say they won’t join a bond sale this year. Tighter euro-area fiscal rules oblige states to balance budgets by 2020.
Hesse, the state that’s home to Frankfurt and is run by the CDU with the Free Democrats, won’t decide whether to join the bond until it gets final estimates on savings, state Finance Minister Thomas Schaefer said in a June 7 telephone interview.
Thuringia state, which is led by the CDU with the SPD as junior partner, has 18 billion euros of debt and expects no savings by joining the bond, Alexander Flachs, the state’s Finance Ministry spokesman, said by phone yesterday.
Norbert Walter-Borjans, finance minister of Germany’s most populous state, North-Rhine Westphalia, said in a May 24 interview that regional premiers had failed to persuade Finance Minister Wolfgang Schaeuble to accept joint liability for the bond. At the same time, states can make savings even if each is responsible for its own share of the debt, he said.
State leaders say that Schaeuble last year initially signaled the federal government would share full liability as the price for gaining their approval for the bill to incorporate the EU’s fiscal compact into German law. Schaeuble’s ministry rejected full liability in a statement on June 25, 2012.
North-Rhine Westphalia owes a third or 180 billion euros of the 16 states’ total debt of 586 billion euros and is rated AA-for its long-term obligations by Standard & Poor’s, compared with the federal government’s AAA.
German constitutional law bars the government from allowing a state to become bankrupt, implying that a degree of added security is attached to the Deutschland Bond even if full federal co-liability isn’t incorporated in the debt’s terms.
States like Walter-Borjans’ North Rhine-Westphalia are counting on attracting international investors to the bond and believe that its potential success will lead to repeated sales to create a large liquid market. Past sales of so-called “jumbo” bonds in which German states group together for ad hoc debt sales have mainly targeted domestic investors and haven’t generated a secondary market.
A Deutschland Bond may be sold as early as the third quarter this year, according to the Finance Ministry in Berlin.
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