VOLK The zero-deficit rule is a strong disciplinary mechanism. The main purpose is to achieve structurally balanced budgets on a medium-term basis, in other words to prevent debt from rising. There are exemptions to the zero-deficit requirement in case of natural disaster or, if needed, to stimulate the economy on a countercyclical basis.

Overall, under the zero-deficit requirement a significant increase of debt over the medium term will be formally more challenging than without such a constitutional rule, and debt may actually go down over the medium term. However, debt is unlikely to disappear in the foreseeable future particularly given the generally strong expansion of the public sector in recent years – which is probably true for all western societies.

VOLK That’s right – at least for the foreseeable future. Moreover, the zero-deficit rule applies only to the federal states and not to the federal-state agencies.

LAUTENSCHLÄGER The most frequently asked question is if we will be in the market on a regular basis in future. The sense I get is that investors are worried about being able to get hold of enough bonds that meet their credit-quality criteria and return targets.

As the state development agencies offer a pickup over sovereign bonds and issuers with a direct government backing, our bonds are always a nice diversification for investors’ portfolios.

With regard to L-Bank specifically, over the last nine months we have had more bonds maturing than we have refinanced. This has been a big concern for investors – that we are not providing the same volume of bonds that are maturing. I don’t think we are the only issuer in this position.

This is an indication to me that investors are starting to be concerned that, with the stabilisation of the public-sector finance situation, their investment opportunities will start to subside.

This is a tricky issue – on one hand investors want triple-A quality with low outstanding debt, but on the other they want a triple-A they can invest in via liquid lines.

BEUER From talking with investors globally, when we are asked about our funding plans for the next couple of years we can say we differ a bit from federal states because our funding needs are more driven by our mission to help the regions. We are not dependent on structural situations or cyclical changes.

In this context, development business is running well so there is no need to reduce our funding volume. Our approach is that we would like to diversify – including in the Kangaroo market. The forecasts are that we will have a stable funding volume over the next few years, so the outlook is healthy.

REINER In the environment of shrinking issuance volume in this sector, one could expect issuers to behave purely opportunistically and try to achieve funding costs that are as attractive as possible. However, this is not the case for L-Bank and NRW.BANK. Both issuers deem Kangaroos as a strategic market. They are committed to the market and issue even if they have to pay up compared with other currency options they have.

LAUTENSCHLÄGER What investors are looking for is how predictable and reliable issuers are in the market. In our case, and that of NRW.BANK, we can say we have a stable business model so we are in a better position than other public-sector issuers that may be driven by tax revenues or political and spending decisions, or that are restricted by constitutions.

VOLK Even for the public-sector issuers like the federal states and the sovereign, the idea of no issuance is a bit far-fetched. Even in the case of a flat budget there are significant refinancing activities. Moreover, the idea behind the zero budget-deficit rule for federal states was to prevent debt from rising further.

It was a quasi recognition that total public-sector debt to GDP in Germany is pretty high compared with other triple-A rated countries like Switzerland, Norway or Sweden. So it’s not that the debt will disappear soon.

YEOMANS It’s still early stages and we have clearly witnessed a bit more volatility this year than we have seen over the last decade. In euros, where the agencies have comparable lines with the likes of KfW Bankengruppe, the German state agencies like L-Bank and NRW.BANK have outperformed and displayed less volatility.

That said, it’s always very difficult to separate short-term volatility from the longer-term factors that influence bond relative performance. I think the fairest thing to say right now is that declining issuance is a positive factor but one that ultimately will only play out over time.