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German Länder: Painted into a corner

Some issuers seem to have a natural talent for tripping up syndicate banks. In this respect few borrowers rival Germany's Länder, who recently issued their fifth joint Eurobond. No Länder-Jumbo has ever been a notable success, but this deal seems to have made everyone a loser.

Traders who lost money by shorting the Dm1 billion ($570 billion) issue claim flawed pricing was to blame. The bookrunners, who lost money by supporting such ambitious pricing, accuse foolhardy speculators who should have realized shorting was dangerous. The issuers probably got off lightest: they lost only a bit more of their battered reputations.

At the heart was fundamental disagreement about how the market should value debt issued by the Länder. The value is obscured by the illiquidity of domestic markets, the lack of explicit ratings for the Länder, and the fact that all are guaranteed by the triple-A federal government. But vanity also plays a role.

Five of Germany's weakest regional economies chose a spread as low as 23bp over the benchmark 10-year Bund. "It's not easy to do the pricing," says Hamburg's treasurer Johannes Berndt. "We decided to follow the swap curve."

The five treasurers used an indicator showing a synthetic pricing for 10-year debt from all 16 federal Länder.

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