July 9, 2012
To gain the approval of the fiscal compact by the German Bundesrat, the federal government made the concession to issue joint bonds with the German Länder. The total value of outstanding Länder bonds is currently EUR 340 bn (Bund: EUR 1,287 bn), which is roughly equivalent to 55% of the overall Länder debt. Refinancing needs in 2013 amount to EUR 46 bn.
Although many details are not yet known, one important fact is clear: there will be no joint but separate (pro rata) liability of the Federation and the Länder for those bonds. This makes them quite similar to existing Länder Jumbos (current volume EUR 26 bn). Hence the fiscal advantages for the Länder are limited to the positive effects of increased liquidity (e.g. higher volume) resulting in lower interest payments for the Länder. The amount of interest payments saved will also depend on how much of Länder funding is executed via these bonds and on the federal share in the respective bond(s). At the end of the day it is unclear whether the Federation would accept a partial default of a joint bond as this could damage the reputation of Federal bonds. But certainly, fiscal and institutional relations between the Länder and the Federation are much deeper than between EU member states. Also, the (fiscal) influence of the federal government on the Länder is much greater. Because of the existing implicit guarantee of the Federation for the Länder (and vice-versa) and the fiscal equalization scheme spreads between Länder bonds and Federal bonds are around 50-100bps. This is much narrower than between fiscally sound and distressed EU member states, but currently exceeds spreads among the fiscally sound euro core.
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