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Sub-sovereign bonds prove slow to catch on in Europe

Not so long ago touted as a major growth area, the market for bonds issued by European regions and municipalities has proved to be a steady rather than spectacular performer, with old stagers such as the German Länder dominant and newcomers rare. Devolution of power from the centre has not been as fast as expected and despite central governments’ desire to offload debt burdens there are doubts about the viability of sub-sovereign bond finance when it is more costly than central government borrowing.

Opening a new highway in Saxony-Anhalt
financed by state bonds

When the Soviet forces pulled back from their central European satellites a decade ago, they inadvertently left a trail of devastation in eastern Germany. The weight of retreating T-72 battle tanks and other heavy vehicles damaged bridges spanning the Elbe such as the Friedens Brucke. "You can imagine what that meant for the construction. All the bridges had to be repaired," says Axel Guehl, treasurer at the Saxony-Anhalt finance ministry. To fund reconstruction, the cash-strapped German Land hit on the idea of a sub-sovereign bond. In December 1993 it issued a e300 million ($267 million) 20-year fixed-rate bond, raising finances to improve the state's infrastructure.

Saxony-Anhalt hasn't looked back. Since then it has issued a further 18 bonds worth just over e12 billion in total, making it one of the most prolific issuers of its kind in Europe.

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