3 Issuing costs of state guaranteed bonds - Financial Risk and ...

2 Overview of state guarantee schemes
Secondly, while this utilisation rate still represents a substantial figure of €711.9bn, national
governments would have to make payouts to investors only in the event that banks cannot honour
their SG bond payments to investors.
Two factors therefore made state guarantees attractive to governments. Approved measures
signalled that national governments were willing to intervene in the banking sector to maintain
financial stability, which may have served to restore the confidence lacking in wholesale funding
markets. Further, participation in state guarantee schemes bore no immediate cost to national
governments but only future cost in the event of default on SG bonds.
Table 1 provides more detailed information on the patterns of issuance activity, by Member State,
including for New Member States which approved among the smallest set of state guarantees.
Interestingly, a number of ad hoc interventions also took place in Member States including
Belgium, Denmark, France, Luxembourg, Portugal, Sweden, Slovenia, Slovakia and the UK. The
total value of these interventions was €429.1bn or 3.5% of EU27 GDP. Many of these were also
within the scope of the EU common principles set out for state guarantee (European Commission,
2008) on the basis that guaranteed banks were of systemic relevance.
That being said, a minority of ad hoc interventions were aimed at supporting more troubled
institutions. Two examples are Dexia, which was jointly guaranteed by France, Belgium and
Luxembourg, and Hypo Real Estate (HRE), which was guaranteed by Germany.
Indeed, Hypo Real Estate received a more complex set of interventions aimed at securing credit
from a private consortium of banks and the Deutsche Bundesbank. Panetta et al. (2009) report
that the package included a state guarantee of €20 billion and an additional guarantee outside the
main scope of the main set of state guarantees of an HRE note of €15 billion eligible for
Eurosystem refinancing. The two guarantees supplemented a secured HRE note (€15 billion)
subordinated by a German financing consortium in exchange for HRE collaterals (€60 billion) that
were not eligible for Eurosystem refinancing.
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