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Central and Eastern European covered bonds

15 January 2015
Richard Kemmish


In my office I have a small, mounted piece of the Berlin Wall. In the 1990s it was a popular souvenir available at every gift shop in Berlin. Kitsch? perhaps but it is a symbol of a wonderful event in history.  The fall of the wall, twenty five years ago, and the subsequent reunification of Germany I would argue was a hugely significant event in the history of the covered bond market. But it should have been an even larger.

It is difficult to think now but as recently as the 1990s Germany had a huge need to attract foreign investment to fund reunification. In 1995 the sleepy, illiquid pfandbrief market invented the dual concepts of the jumbo covered bond and market making and in less than five years grew to over €1trillion, much of it invested by foreigners. Just as significantly it provided a model for, in particular, the Spanish to channel vast foreign investments in their property market ten years later (about €300bn in total, almost identical to the increase in the value of all Spanish real estate over the same period). The rest, as they say, is history.

But what didn’t happen after the wall came down – with some honourable exceptions – was the development of a particularly convincing Eastern European covered bond market. Whereas in most western European countries the covered bond market is roughly 30 – 40% of GDP in Eastern Europe it is closer to 3%. Even in the most developed markets there (Hungary, Czech republic and  Slovakia) it is still nowhere near 10% of GDP. Most countries in the region have no covered bonds outstanding at all. Which, isn’t to say they don’t have a covered bond law, they just can’t or won’t use it.
 
It isn’t as if there isn’t a need for the product. Mortgages are difficult to get, short term, expensive and effectively only available to the middle class. Most countries in the region still need foreign direct investment and/or a robust source of bonds on which to develop local currency market infrastructure.

What is holding the market back? Many things but certainly that would include problems with the legal infrastructure – the absence of a workable land registry for example, getting the covered bond law wrong (no, you can’t put the pfandbrief law into google translate and hope for the best) and the foreign ownership, and therefore cheap funding, of much of the banking system.

Next week Euromoney will be holding the 20th edition of their Central and Eastern European forum in Vienna. This is a huge event covering many topics of which I have been asked to moderate the bank funding panel. As regular readers might expect I fully intend to bring up the topic of the shortage of covered bonds in the region on my panel.

My panel is at 11:55 in Park Congress 1. Please come along and – the traditional moderator’s plea – please ask questions. It’s what we are there for.

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Tags: Covered Bond