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Capital Markets

Time is running out for the Landesbanken

With just over a year left before they lose the state guarantees that they rely upon for cheap financing, several German Landesbanken still do not have a clear strategy. Investors have reacted by rewarding those that have communicated a strong business plan. Katie Martin reports.

RATINGS AGENCY Standard & Poor's did not make many friends in German banking last winter. On November 14 an article appeared in the newspaper Handelsblatt containing unofficial preliminary S&P ratings. They revealed a worrying prospect for German Landesbanken – that when they lose their state guarantees in July 2005, they can wave goodbye to their comfortable S&P ratings, which now range from AAA to AA-, and start to issue on ratings between A+ and BBB, which will be much more costly.

"We differ from the other agencies because we said they would not all be single A," explains Stefan Best, director of the financial institutions rating group at S&P in Frankfurt. "The Landesbanken have been viewed as a uniform asset class and this is going to change."

This news should not be a surprise to the German banking community. After all, the European Commission outlined its plans to abolish state guarantees on Landesbank debt back in 2001. But bankers, supervisory bodies and politicians were all still unhappy at what they perceived to be premature ratings decisions, especially as the target for Landesbanken standalone ratings is in the single A range.

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