As Germany gears up to introduce so-called D-Bonds we might sense some irony that it was unable to bring itself around to back the idea of a common European government bond.
I have long been a critic of the common European bond, and Germany has elegantly argued why it would not be in the interests of northern European nations to “subsidise” the yield of spendthrift economies further south.
At one point, France also opposed the common European bond. That was until it was downgraded by Moody, losing its universal AAA status. Since then France has taken its all-too-familiar culturally-compliant position of being pragmatic and has supported the idea of a common European bond, much to Germany’s displeasure.
But now, via the funky new D-Bonds, Germany’s federal government appears happy enough to back a common bond structure with its own regional state governments, the Lander. What is remarkable is that some of these Lander have a lower rating that the Republic of France!
One bond strategist who has looked closely at the D-Bond model is Commerzbank’s Rainer Guntermann.
According to him ” the D-bond is not really common issuance. Liabilities will be shared rather than joint-and-several. Joint-and-several liabilities are not possible on paper, even though I guess that we all have a strong feeling that the Federal state would cover shortfalls of its subordinated levels. A truly joint German bond would have been too close to the idea of eurobonds.”
But a handful of the 16 Lander have decided not to join in the D-Bonds facility. So how disunited this all is only goes to demonstrate how deals are done for the benefit of a group but not always everyone.
Perhaps the takeaway from this is that what we ought to have seen is a narrower definition of a common European bond. A bloc with France, The Netherlands, Finland and Austria. These nations could at least have defended their individual and common interests, a bit like in the days of the so-called Deutschemark-bloc pre the introduction of the euro in 1999, if taking in Greece, Italy and Spain would have been a bridge too far. For now, it appears that idea has been shelved.