WSJ: Allianz Wants An EU-Backed Bond Insurer To Help Weaker Nations
13 April 2011 - 6:55AM
Dow Jones News
German insurance giant Allianz SE (ALV.XE, ALIZF), one of
Europe's biggest investors, is urging the region's leaders to
establish an EU-sponsored bond insurer to help fiscally weaker
countries that have been shut out of capital markets attract fresh
funding.
A European Union debt insurer would reduce countries' borrowing
costs and make it easier for investors to calculate the risk of
investing in government bonds, argues Allianz Chief Financial
Officer Paul Achleitner.
Ensuring European countries access to capital markets would
reduce the risk that they would default. That, in turn, would help
avert a future banking crisis by reducing pressure on European
lenders, the largest holders of public-sector debt in Europe. The
proposal would limit investor exposure to a default to 10% of the
total investment.
"That is something that I as an investor can put my hands around
because I now understand that my maximum loss will be 10% of the
total," Mr. Achleitner, who recently presented the idea to leaders
in Berlin and Brussels, said in an interview . "I can price
accordingly, i.e. my demands on the interest rates are going to be
more rational and therefore more bearable for the issuer."
While the suggestion for a European bond insurer isn't new,
Allianz's advocacy of the idea could help it gain traction in
policy circles. The senior European officials Mr. Achleitner has
discussed the idea with, including Germany's leaders, have been
receptive, but noncommittal, he says. One hurdle would be to
overcome restrictions under EU law that prevent countries from
guaranteeing one another's debt. A spokesman for the German finance
ministry declined to comment.
Mr. Achleitner says Allianz, which owns Pacific Investment
Management Co. in the U.S. and has about 1.5 trillion euros ($2.16
trillion) in assets under management, wouldn't benefit directly
from the existence of a European government-bond insurer. He says
that he is pushing the idea only because he thinks it would help
resolve the current crisis and help avert future ones.
Private-sector insurers couldn't take on the risks involved, given
the huge sums at stake, making an EU-sponsored solution the only
option, he says.
Under the proposal, European governments would use a portion of
their planned 500 billion bailout fund--the European Stability
Mechanism--to capitalize a new insurer. Countries could then issue
bonds insured by the new entity, which, like the ESM itself, would
have a top credit rating.
With insurance attached, the bonds would be less risky and
investors would demand a lower interest rate than is currently the
case, Mr. Achleitner says. That would make it much easier for
countries to tap credit markets and borrow on a sustainable basis.
Countries issuing the bonds would pay a premium to the insurer,
based on their credit risk. That premium income would accumulate in
the fund and be used to pay bondholders in the event of a
default.
"If [an insurance mechanism] had existed, it could have helped
avoid the situation we have seen since early last year. It would
reduce taxpayer exposure to a default," says Mathias Hoffmann, a
professor at the University of Zurich who has studied the issue.
"There's probably no way to bail out a France or Germany or Italy
or even Spain. But the risks we see with Greece, Portugal and
Ireland could have been averted if we made clear this is how far
European solidarity would go and how much we're willing to
pay."
Nevertheless, the idea will likely be controversial in countries
such as Germany, where there is strong public resistance to
offering financial assistance to countries that have run up huge
debts. Yet Mr. Achleitner, the former head of Goldman Sachs Group
Inc. in Germany, says that the alternative to insuring
debt--bailing out countries such as Greece when they can't access
debt markets--is even costlier.
"The political fallout issues are less dramatic inside an
insurance system than they are with every tranche of cash that you
send to a needy member state," he said.
The idea is roughly based on U.S. monoline insurers, such as
MBIA Inc. and Ambac Financial Group Inc., which insure municipal
debt. Such companies flourished for decades, but ran into trouble
during the financial crisis after diversifying away from their core
business of covering municipal debt into insuring the kinds of
complex financial products responsible for much of the turmoil.
Investors in European government bonds currently rely on
insurance-like contracts known as credit default swaps, or CDS, to
hedge against the risk of default. Government CDS markets in Europe
aren't very liquid and are widely regarded as a poor gauge of a
country's creditworthiness.
"Market participants are making assumptions about political
actors," Mr. Achleitner said. "That doesn't necessarily add up to
meaningful interest rates."
An EU insurer would be a much better judge of risk, he argues,
for the simple reason that the owner of the entity--the EU--would
also determine whether a member state defaults or not.
"This the only situation I know of in the world of insurance
where the insurance carrier determines if the default or damage
case actually occurs," he said.
--Brian Blackstone contributed to this article.