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The Bund stops here

Can Germany's Bund become the sovereign benchmark bond in Europe after the introduction of Europe's single currency in 1999? The debt office in Bonn and the Bundesbank have both made urgent reforms, but the government continues to shirk vital decisions. And the lacklustre performance of the government suggests that borrowing targets may be missed. The consequences will be serious both for interest rates and Germany's standing in European capital markets

A phone call to Germany's debt office on Monday, February 10, went unanswered. It's Rosenmontag, at the climax of the German carnival season, and all the staff responsible for borrowing on behalf of the Federal Republic of Germany are in the streets of Bonn enjoying a Rhineland carnival parade. The nation's Dm54 billion ($32 billion) borrowing programme for 1997 is on hold until the next day.

Although few countries borrow as much on the capital markets as Germany does, few spend so little doing it. The public servants responsible for the finance ministry's cost-cutting programme may well be proud that they pay fewer than ten people to work full-time on German national borrowing. (Bankers say there are only three people who make the real decisions.) Yet they seem unaware that Germany might save tens of millions of Deutschmarks every year in borrowing costs were more time and resources spent on better management of Germany's sovereign debt.

Take Bonn's recent decision to allow stripping of interest coupons from the principal of German sovereign issues (Bunds). Sources at the Bundesbank, its fiscal agent, say they spent two years trying to persuade the finance ministry to permit this innovation.

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