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German finmin defends new debt agency plan

BERLIN: Germany's Finance Ministry is defending a plan to farm out its debt management to a private company, a scheme that has caused tension between the government and the Bundesbank.

Joachim Henke, head of the ministry's money and credit unit, told Handelsblatt newspaper the new agency would not damage German debt's solid reputation.

"One of our goals is to strengthen the benchmark function in the 10-year area where we already have it and to win it the areas where we don't, in the five-year-and-below areas," Henke said.

Finance Minister Hans Eichel announced formation of the debt management agency last Wednesday, provoking a row with Germany's top fiscal guardian, the Bundesbank.

The Bundesbank, which would be effectively stripped of its debt management role, said it had not been consulted.

The central bank has opposed attempts to shift debt issuance towards shorter-term maturities. Bundesbank President Ernst Welteke has said the new agency could lead to a risky shift in the government's short-term debt issuance.

Welteke said the government's goal of cutting debt management costs by up to one billion marks per year could not be achieved without a move to more risky short-term debt instruments and derivatives.

"Savings on interest payments can be achieved only through higher risks and this is a policy decision," he told the Boersen Zeitung newspaper on Saturday.

Karl Diller, state secretary in the Finance Ministry, insisted:

"The government's rating will be absolutely untouched by this. The government does not intend to fundamentally change the market for government securities with its restructuring of the how it serves the market," Diller said in Handelsblatt.

But Bundesbank council member Helmut Schieber remained unconvinced.

"The worst-case scenario is that short-term interest rates are higher than long-term rates," he told the Sueddeutsche Zeitung daily in an interview. He called on the government to give the Bundesbank a full briefing.

The government and the Bundesbank wrangled in 1997 when then-Finance Minister Theo Waigel tried to revalue some of the Bundesbank's gold reserves. He made his displeasure known, forced a public spat and the government was forced to back down.

Since the European Central Bank was set up, the Bundesbank has lost its role in setting the pace for European interest rates but remains a force on international debt markets.

Separately, the Finance Ministry denied a Handelsblatt report that Andersen Consulting director Andreas von Schoeler, who came up with the debt management proposal, had been appointed head of the debt management company.-Reuters