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Derivatives: Bonn wins right to swap

Wanted: swap dealers to work for department seven of the federal finance ministry in Bonn. Why? Because in November, the budget committee voted to allow the government to write interest rate swaps on its debt.

The purpose is to achieve greater flexibility in debt management, and also to lower the cost of borrowing as Germany tries to squeak inside the Maastricht criteria.

But the Bundesbank is not amused. At the budget committee hearing, Bundesbank director Johann Wilhelm Gaddum set out the view of the guardians of the German currency: there would be a "conflict of interest," he said, between the interest rate policy of the Bundesbank and the effect on interest rates of the government swapping its long-term debt into short-term floating-rate liabilities.

Rubbish, say bankers. The government already issues short-term Bu-bills, and it has plenty of floating-rate debt in the form of Ausgleichsforderungen (equalization payments) for frustrated claims on former East German state-owned companies: swaps are just a continuation of debt management by other means.

But the Bundesbank also has an ally, the Bundesrechnungshof (federal audit office), which opined at the hearing that it is "not the job of the federal government to speculate on interest rates."

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