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Cents & sensibility

Should Deutschmark and French franc bonds be converted to the nearest euro, or to two decimal places - to the nearest euro cent? Arcane as this discussion may seem it has come close to fisticuffs among the Perrier and sandwiches as government officials and trade bodies try to ensure a liquid euro securities market in 1999. David Shirreff reports.

Fear of the orphan bond is stalking Europe. This is the fear that, after the introduction of the euro in 1999, bonds in the national currencies whose exchange rates are locked will lose liquidity. They will have no benchmarks to trade over.

With the elimination of exchange and interest rate differences, investors will gravitate towards the biggest euro benchmarks. Market makers will lose interest in classes of bonds destined sooner or later to disappear. By 2002 all payment of interest and principal must be made in euro.

A foretaste is given by a City of Munich bond still denominated in wartime Reichsmarks. This 4% bond of 1944 was never redenominated but is being serviced at a rate of Dm1 to 10 Reichsmarks by the government debt agency the Bundesschuldenverwaltung - an orphan to beat all orphans.

To keep investors loyal, governments of euro states, especially the smaller countries, will want to redenominate their benchmark national currency bonds into euros "as quickly as possible", says Kari Nars, Finnish executive director at the European Bank for Reconstruction & Development.

The bigger member governments will also want to redenominate to give their own financial markets maximum opportunity to maintain or increase trading volumes.

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