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Covered Bond Blog: Tillykke!*

17 July 2015
Richard Kemmish

Which country issues the most covered bonds? Impossible to be totally certain as the aggregate market data is always at least six months out of date but the answer is probably Denmark.

Let me just explain that one, as of the end of last year the Danish market was €27bn smaller than the German market. But as the Danish market grew at nearly €1bn equivalent per month last year and the German market shrank at nearly five times that rate, by my calculations the Danes will have overtaken the Germans in mid-June (no, I haven’t factored in the slight appreciation of the Danish Krone this year, do you really think I am that conscientious?).

Now that we’ve got that out of the way, what are the economic implications of this counter-intuitive statistic?
Probably none. The insularity of the Danish covered bond market is (in)famous, about 80% of those bonds are Danish issuers selling krone denominated bonds to Danish investors. In terms of total euro denominated covered bonds outstanding, Denmark would come round about 10th on the list, neck and neck with Ireland. So no economic impact on the euro investors.

As for the Danish krone investors, not too much impact either. The 3% year-on-year growth rate seems to be fairly manageable and the size of the pfandbrief market is more or less irrelevant for pension funds with very strict limits on non-krone investments that they can make.

But even if the economic implications of this statistic are minimal, it can’t be dismissed entirely. From a ‘soft power’ perspective being the biggest market in Europe must carry some weight. A weight enhanced by the importance of covered bonds to Denmark (in terms of covered bonds to GDP, Denmark is nearly 10 times more reliant on covered bonds than Germany). 
The unique characteristics of the Danish covered bond market have frequently been at odds with the European desire to impose regulatory standards predicated on uniformity.

Take the liquidity cover ratio rules. These seem sensible enough if you are used to non-Danish markets, in particular the tendency to have both a large liquid government market in your home currency and the tendency for investors to buy term bonds and not roll them over. But transposed into the Danish market these rules have the potential for immense harm.
If we (by which I mean non-Danes) have anything to thank the Danes for (apart from lego and moody crime dramas) it is surely their lobbying to change the LCR rules to be more covered bond friendly. The change was a massive boost for us; its absence would have been a massive problem for them.

But this is a ‘soft’ rather than an economic factor. For the market to really start to be influenced by the relative changes in the size of covered bond markets, we need to ask which country is the largest issuer in the Eurozone. Which is of course Germany, still. And will continue to be, based on current trends, until, er, next year. Then France will take over. Felicitations.  

 *that’s congratulations in Danish. According to google translate.

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