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Capital Markets

European government guarantee packages: Guaranteed to confuse

The government guarantee packages established across Europe will have serious implications for covered bonds. Few have followed Germany’s example of using the guarantee’s language to implicitly protect the Pfandbrief market, and while some explicitly include covered bond issues, others explicitly leave them out. Still others have yet to confirm the treatment of covered bonds either way. The speed with which the packages have been put together means that many details are yet to emerge.

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France

The French guarantee package comprises a €320 billion fund for refinancing debt and €40 billion for the recapitalization of, or investment in, financial institutions. The state will issue guaranteed loans backed by bank collateral, including first-lien mortgage loans. This could discourage covered bond issuance, but that will depend on the fee charged for the loans. The wording of the guarantee states that the fee will be in line with the cost of financing in "normally operating financial markets", which clears things up not at all.

UK

Eligible institutions for the UK government’s 2008 credit guarantee scheme are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide, RBS and Standard Chartered. Other banks can be added at the discretion of the Treasury. The government expects about £250 billion of its guarantee fund to be taken up. The guarantee is applicable to non-complex, vanilla instruments. Covered bonds are not included in the scheme. HM Treasury said that to do so would "call into question the nature of the bond".

Spain

€100 billion has been made available for debt guarantees, as well as a €30 billion fund to purchase high-quality bank assets by public auction. It is not yet known which instruments will be eligible and which will not, including covered bonds, but those that are must have a maturity of less than five years.

Denmark

All senior unsecured debt, including money market deposits, will be guaranteed in Denmark. In case of insolvency, the government has pledged to cover losses exceeding its DKr35 billion ($6.2 billion) fund. Covered bonds, however, are explicitly excluded from the package. The nature of the Danish mortgage market, where each mortgage loan must be funded by a mortgage bond on a one-to-one basis, precipitates this stance from the government.

Ireland

Eleven banks have been guaranteed by the Irish government. As in the UK, additional banks might be approved. The Irish guarantee covers all types of debt, including covered bonds. Interestingly, HRE’s public sector arm, Depfa, along with its covered bond issues, is excluded from both the German and Irish guarantees. It seems neither country considers the bank to be under its jurisdiction.

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