The Financialisation of Sovereign Debt: An Institutional Analysis of the Reforms in German Public Debt Management

Abstract

This study explores the financialisation of sovereign debt through an in-depth study of institutional change in German debt management. Between 1998 and 2006, the Ministry of Finance fundamentally altered the management of federal public debt by not only disempowering the Bundesbank and Federal Debt Administration as debt managers and outsourcing this task to a new agency, the Federal Finance Agency; moreover, the conservative debt strategy was replaced by strict market orientation. Conceptualising this change as institutional innovation, the paper argues that the Ministry of Finance played a leading role in the reform process. It shows that the arrival of the Euro brought with it a power struggle between the Ministry and the Bundesbank. The evidence fits better the concept of institutional innovation as a result of entrepreneurship than approaches which conceptualise institutional innovations as consequences of profit maximisation or layering and displacement.

ABOUT THE AUTHOR

Christine Trampusch is Professor of International Comparative Political Economy and Economic Sociology at the University of Cologne. She is co-director of the Cologne Center for Comparative Politics (CCCP) and Liaison Professor to the Max Planck Institute for the Study of Societies. Her research centres on the study of the origins and changes of socio-economic institutions in financial and labour markets. Her recent publications include articles in European Journal of Political Research, European Journal of Industrial Relations, British Journal of Political Science, British Journal of Industrial Relations, Governance, New Political Economy, Regulation & Governance and Australian Journal of Political Science.

Notes

1 H.J. Blommestein, ‘Overview of Trends and Recent Changes in the Structure of OECD Public Debt Markets and Debt Management Operations’, in OECD, Debt Management and Government Securities Markets in the 21st Century (Paris: OECD, 2002), pp.9–49; L. Kalderen and H.J. Blommestein, ‘The Role and Structure of Debt Management Offices’, in OECD (ed.), Debt Management and Government Securities Markets, pp.101–33; E. Currie, J.-J. Dethier and E. Togo, ‘Institutional Arrangements for Public Debt Management’, World Bank Policy Research Working Paper 3021, April 2003; C. Trampusch, F. Fastenrath and M. Schwan, ‘The Financialization of Sovereign Debt Management between 1980 and 2010: A Cross-national Analysis of 23 OECD Countries’, unpublished paper (2014).

2 G. Piga, Derivatives and Public Debt Management (Zurich: ISMA, 2001), available from http://www.icmagroup.org/assets/documents/Derivatives%20and%20Public%20Debt%20Management.pdf, p.18.

3 Andersen Consulting, ‘Kurzfassung des Gutachtens zur Frage “Auslagerung des Debt Management des Bundes”’, Finanzausschuss, Ausschuss-Drucksache 14/0268 (2000).

4 J.L. Campbell, Institutional Change and Globalization (Princeton, NJ: Princeton University Press, 2004); P.A. Hall and K. Thelen, ‘Institutional Change in Varieties of Capitalism’, Socio-Economic Review 7/1 (2009), pp.7–34.

5 N. van der Zwan, ‘Making Sense of Financialization’, Socio-Economic Review 12/1 (2014), pp.99–129, at p.103.

6 L. Davis and D. North, ‘Institutional Change and American Economic Growth: A First Step towards a Theory of Institutional Innovation’, Journal of Economic History 30/1 (1970), pp.131–49.

7 W. Streeck and K. Thelen, ‘Introduction: Institutional Change in Advanced Political Economies’, in W. Streeck and K. Thelen (eds), Beyond Continuity: Institutional Change in Advanced Political Economies (Oxford: Oxford University Press, 2005), pp.1–39; J. Mahoney and K. Thelen, ‘A Theory of Gradual Institutional Change’, in J. Mahoney and K. Thelen (eds), Explaining Institutional Change: Ambiguity, Agency, and Power (New York: Cambridge University Press, 2010), pp.1–37.

8 J.A. Schumpeter, The Theory of Economic Development (Cambridge, MA: Harvard University Press, 1934); J.A. Schumpeter, ‘Comments on a Plan for the Study of Entrepreneurship’, in R. Swedberg (ed.), The Economics and Sociology of Capitalism (Princeton, NJ: Princeton University Press, 1991), pp.406–28; J. Beckert, ‘Agency, Entrepreneurs, and Institutional Change: The Role of Strategic Choice and Institutionalized Practices in Organizations’, Organization Studies 20/5 (1999), pp.777–99; A.D. Sheingate, ‘Political Entrepreneurship, Institutional Change, and American Political Development’, Studies in American Political Development 17/2 (2003), pp.185–203.

9 P.A. Hall. ‘Systematic Process Analysis: What it is and How to Use it', European Political Science 7/3 (2004), pp.304–17.

10 Ibid., p.314.

11 The author of this article gathered and analysed all written primary sources on the reform which were publicly available.

12 Newspaper articles were searched by using the online database ‘Lexis Nexis’ and the internet.

13 T. Barber, ‘Institution is Slow to Catch Up with Changing Times: Dogged by a Bureaucratic Power Struggle, Germany's Central Bank – Once Said to be More Respected than the Government – is Having Trouble Finding Itself a New Role’, Financial Times, 23 Oct 2000, p.3.

14 Campbell, Institutional Change and Globalization, p.32.

15 E.M. Rogers, Diffusion of Innovations, 5th edn (New York: Simon and Schuster, 2003), p.12.

16 T.J. Hargrave and A.H. Van de Ven, ‘A Collective Action Model of Institutional Innovation’, Academy of Management Review 31/4 (2006), pp.864–88, at p.866.

17 The Bundesbank is a ‘directly federal corporation of public law’ (Bundesmittelbare Anstalt des Öffentlichen Rechts) and therewith neither subjected to parliamentary nor ministerial control. J. Westrup, ‘The Politics of Financial Regulatory Reform in Britain and Germany’, West European Politics 30/5 (2007), pp.1096–119, at p.1101.

18 The legal framework was set by the Reichsschuldenordnung (RSchO) of 1924, the Reichsschuldbuchgesetz (RSchbG) of 1891/1910 and the Gesetz über die Deutsche Bundesbank of 1957.

19 For example, as a result of this informal rule neither the federal government nor the Länder used foreign currency bonds because the Bundesbank position on this issue was accepted. There was no law which forbade the federal or the Länder governments from issuing such bonds. Börsen-Zeitung, ‘Länder dürfen Anleihen in Fremdwährungen begeben’, 27 Feb. 1999, p.4.

20 The Bundesschuldenausschuss consisted of the President of the Bundesrechnungshof (BRH) and three members of the Bundestag and Bundesrat respectively.

21 Bundesministerium der Finanzen (BMF), ‘Geplante Änderung des Schuldenmanagement’, Finanzausschuss, Ausschuss-Drucksache 14/0325 (2000), p.3.

22 Investment Professionell, ‘Diversifikationspotenziale für beide Seiten’, Interview mit Gerhard Schleif, Geschäftsführer der Bundesrepublik Deutschland Finanzagentur, Investment Professionell 2/2006, pp.4–5.

23 Süddeutsche Zeitung, ‘“Die Informationsquellen nicht verschmutzen” – Bundesbank-Direktoriumsmitglied: Derivate nicht als geldpolitisches Instrument einsetzen’, 5 Oct. 1995, p.20; Börsen-Zeitung, ‘Staatliche Derivate-Nutzung begrenzen; Meister wünscht Standards – Gefahr der Schadensübernahme’, 6 Nov. 1996, p.4.

24 The main reform steps were the introduction of interest-rate swaps by the Finance Act of 1998, the creation of the Finanzagentur GmbH in September 2000 and the enactment of the following two acts which made the Finanzagentur to the main fiscal agent, disempowered the Bundesbank and abolished the BSV: the ‘Law for the Reform of the Debt Register Law of the Federal Republic of Germany and the Legal Principles for the Administration of German Government Securities’ (Bundeswertpapierverwaltungsgesetz, Federal Securities Administration Act), enacted in Jan. 2002, and the ‘Law for the Modernisation of Federal Government Debt Management’ (Bundesschuldenwesenmodernisierungsgesetz), enacted in July 2006.

25 Founded in Sep. 2000, on the basis of a shareholders’ agreement (Gesellschaftervertrag), the Finance Agency was registered in Jan. 2001 as a limited liability company (GmbH) under the ownership of the federal government. Gerhard Schleif, a banker (DekaBank, 1995–2001) and journalist, and Peter Jabcke (MoF) became executive directors. The Finance Agency, however, was not a new GmbH but evolved out of the CVU Systemhaus Abwicklungsgesellschaft mbH which the federal government had founded in 1990 to liquidate the VEB Robotron-Vertrieb Berlin.

26 Finanzagentur, ‘About Us' (Frankfurt am Main, 2014), available from http://www.deutsche-finanzagentur.de/en/finance-agency/about-us/.

27 This sub-committee was established in Dec. 2002 and replaced the Bundesschuldenausschuss.

28 Systematic data on the deals are not available because the Finanzagentur and the MoF treat the conditions and contents of the swaps as highly confidential. Since 2004 the real swap deals are not even indicated in the budget plan because its publication could influence the capital market development. BRH, ‘Bemerkungen des Bundesrechnungshofes 2005 zur Haushalts- und Wirtschaftsführung des Bundes (einschließlich der Feststellungen zur Jahresrechnung 2004)’, BT-Drks 16/160, 12 Dec. 2005, available from http://dip21.bundestag.de/dip21/btd/16/001/1600160.pdf, p.45.

29 Börsen-Zeitung, ‘Lieber mehr Bubills als Swaps’, 14 Nov. 1997, p.1.

30 Börsen-Zeitung, ‘Wann ist das Ende der Fahnenstange erreicht?; Analysten sind uneinig – Bund-Future gewinnt zeitweise über 100 Ticks hinzu’, 25 Jul. 2002, p.4. The Bund Issuance Auction Group comprises those credit institutions which take part at the auctions for the issuance of German federal bonds. The nominal value of 20 billion Euro allowed in 2002 rose to 80 billion by 2004 (Haushaltsgesetz 2003, BGBl. I S. 574). Since 2005 the financial acts also include the authorisation of 30 billion cross-currency deals. H. Rehm, ‘Debt Management – Reparaturbetrieb oder Gestalter der Öffentlichen Verschuldung?’, Zeitschrift für das gesamte Kreditwesen 23/2005, pp.1319–24, at p.1321. In 2003, among 102 swaps, 60 were EONIA swaps. BMF, Schuldenbericht 2003 (Berlin: BMF, 2003), available from http://www.bundesfinanzministerium.de/Content/DE/Downloads/Migrierte_Downloads/Schuldenbericht-2003.pdf?__blob=publicationFile&v=2, p.41. Between 2002 and 2009 the Finanzagentur used swaps with a nominal value of 250 billion Euro. The federal government planned to save 750 million Euro per year through swaps. G. Beecken, ‘Bundesregierung nutzt bei der Schuldenverwaltung in erheblichem Umfang Finanz-Derivate: Deutschlands jährliches Höchstvolumen bei Swaps von 110 Milliarden Euro könnte durch Neuverschuldung weiter steigen’, Capital, 18 Aug. 2010, available from http://www.presseportal.de/pm/8185/1666655/bundesregierung-nutzt-bei-der-schuldenverwaltung-in-erheblichem-umfang-finanz-derivate-deutschlands. By the end of Dec. 2011, the cash deposit (Barsicherheit) of the swaps done by the federal government was 3 billion Euro, 65 million more than in 2010. BMF, Bericht des Bundesministeriums für Finanzen über die Kreditaufnahme des Bundes im Jahr 2011 (Berlin: BMF, 2012), available from http://www.bundesfinanzministerium.de/Content/DE/Downloads/Abt_2/Kreditaufnahmebericht_2011.pdf?__blob=publicationFile&v=2, p.51.

31 Frankfurter Allgemeine Zeitung, ‘Bundesbank warnt vor inflationsindexierter Anleihe’, 24 Oct. 2006, p.27.

32 Rogers, Diffusion of Innovations; P.J. DiMaggio and W.W. Powell, ‘The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields’, American Sociological Review 48/2 (1983), pp.147–60.

33 Davis and North, ‘Institutional Change’.

34 Streeck and Thelen, ‘Introduction: Institutional Change’; Mahoney and Thelen, ‘A Theory of Gradual Institutional Change'.

35 Schumpeter, The Theory of Economic Development; Schumpeter, ‘Comments on a Plan’; Beckert, ‘Agency, Entrepreneurs’; Sheingate, ‘Political Entrepreneurship’.

36 Davis and North, ‘Institutional Change’, p.139.

37 Ibid.

38 All citations: ibid.

39 BMF, ‘Geplante Änderung', pp.1–2.

40 Börsen-Zeitung, ‘Bund denkt über Einsatz von Derivaten nach; Personalmangel behindert modernes Schuldenmanagement – Kapitaladäquanzrichtlinine umsetzen’, 20 Sep. 1995, p.3.

41 Süddeutsche Zeitung, ‘“Die Informationsquellen nicht verschmutzen” – Bundesbank-Direktoriumsmitglied: Derivate nicht als geldpolitisches Instrument einsetzen’, 5 Oct. 1995, p.20; Börsen-Zeitung, ‘Staatliche Derivate-Nutzung begrenzen'; C. Reiermann, ‘Bundesbank beurteilt den “Zinstausch” skeptisch’, Berliner Zeitung, 13 Nov. 1997, available from http://www.berliner-zeitung.de/archiv/finanzministerium-haelt-die-risiken-fuer-handhabbar---haushaelter-billigen-swap-geschaefte-bundesbank-beurteilt-den--zinstausch--skeptisch,10810590,9362566.html.

42 Börsen-Zeitung, ‘Lieber mehr Bubills als Swaps’, 14 Nov. 1997, p.1.

43 Haushaltsausschuss des Bundestages, Kurzprotokoll der 86. Sitzung des Haushaltsaussschusses, 12 Nov. 1997, 13. Wahlperiode, Bonn, 86/19 and 86/17.

44 G. Wolswijk and J. de Haan, ‘Government Debt Management in the Euro Area: Recent Theoretical Developments and Changes in Practices’, Occasional Paper Series No. 25 (Frankfurt a.M.: ECB, 2005), available from https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp25.pdf, p.5.

45 Frankfurter Allgemeine Zeitung, ‘Wettstreit um den besten Schuldner in Europa ist nicht entschieden; Schieber: Bundesbank könnte sich stärker um die Förderung des Finanzplatzes Deutschland bemühen’, 27 Oct. 1998, p.18.

46 H. Simonian, ‘Germany to Outsource Management’, Financial Times, 17 Feb. 2000, p.38.

47 Börsen-Zeitung, ‘Dresnder Bank begrüßt Zins-Swaps des Bundes’, 11 Nov. 1997, p.3.

48 Reiermann, ‘Bundesbank beurteilt'.

49 Haushaltsausschuss, Kurzprotokoll der 86. Sitzung.

50 BMF, ‘Einsatz von Zinsderivaten zur Senkung der Kosten des Bundes und seiner Sondervermögen’, Arbeitsunterlage für die Sitzung des Haushaltsausschusses am 12.11.1997, 3 Nov. 1997, p.2.

51 Ibid., p.1.

52 Haushaltsausschuss, Kurzprotokoll der 86. Sitzung, pp.86/19 and 86/20.

53 Ibid.

54 Andersen Consulting, ‘“Auslagerung des Debt Management des Bundes”’, p.5.

55 W. Müller, D. Fey and J. Nagel, ‘Reformoptionen für das kommunale Schuldenmanagement. Teil I’, Zeitschrift für Kommunalfinanzen 5/2004 (2004), pp.116–21, at pp.119–20.

56 Ibid.

57 Financial Times Deutschland, ‘Eichels Schuldenagentur gerät auch bei der SPD in die Kritik; Abgeordnete schließen sich Bundesbank-Tadel an’, 17 March 2000, p.11.

58 Focus Magazin, ‘Staatsschulden. Miese selbst verwalten’, 13 March 2000 (11/2000), available from http://www.focus.de/magazin/archiv/staatsschulden-miese-selbst-verwalten_aid_181440.html.

59 Finanzausschuss and Haushaltsausschuss, Kurzprotokoll der 51. Sitzung des Haushaltsausschusses und der 67. Sitzung des Finanzausschusses, 28 June 2000, pp.51/10, 67/10; BRH, Bemerkungen 2000 zur Haushalts- und Wirtschaftsführung des Bundes (Bonn: BRH, 2000), available from https://www.bundesrechnungshof.de/de/veroeffentlichungen/bemerkungen-jahresberichte/2000/2000-bemerkungen-gesamtbericht-pdf/at_download/file; Haushaushaltsausschuss 14/1587: 1; BSV, Stellungnahme zum Gutachten der Andersen Consulting zur ‘Auslagerung des Public Debt Management des Bundes?’, Bad Homburg v.d. Höhe, 10 March 2000.

60 Sheingate, ‘Political Entrepreneurship’, p.191.

61 Mahoney and Thelen, ‘A Theory of Gradual Institutional Change’, p.10.

62 Ibid., pp.7–9.

63 E.g. J. Mahoney, ‘Path Dependence in Historical Sociology’, Theory and Society 29/4 (2000), pp.507–48; Campbell, Institutional Change and Globalization; Streeck and Thelen, ‘Introduction: Institutional Change’; Mahoney and Thelen, ‘A Theory of Gradual Institutional Change'; C. Trampusch, ‘Why Preferences and Institutions Change: A Systematic Process Analysis of Credit Rating in Germany’, European Journal of Political Research 52/2 (2014), pp.328–44.

64 Streeck and Thelen, ‘Introduction: Institutional Change’, p.31; Mahoney and Thelen, ‘A Theory of Gradual Institutional Change', pp.15–16.

65 Haushaltsausschuss, Kurzprotokoll der 86. Sitzung, p.86/17.

66 Ibid., p.86/18.

67 Haushaltsausschuss 13/3496: 6, 10 Nov. 1997, Stellungnahme Bundesbank.

68 Haushaltsausschuss 13/3494: 6, 7 Nov. 1997, Stellungnahme BRH.

69 Quoted in Simonian, ‘Germany to Outsource Management’.

70 Neue Züricher Zeitung (NZZ), 17 Feb. 2000, p.19.

71 E.g. Börsen-Zeitung, ‘Parlament bremst Schuldenagentur; Abgeordnete wollen keine übereilte Ausgliederung’, 17 March 2000, p.5; Financial Times Deutschland, ‘Eichels Schuldenagentur gerät auch bei der SPD in die Kritik'; Berliner Morgenpost, ‘Sparen mit der Schulden GmbH; Finanzminister Eichel will den Haushalt durch neue Struktur der Bundesbank um eine Milliarde DM entlasten’, 2 April 2000, p.21.

72 CDU/CSU-Bundestagsfraktion, ‘Austermann/Henke: Eichel will das Bankgeheimnis aushebeln’, 24 Feb. 2000, http://www.presseportal.de/pm/7846/115353/cdu-csu-bundestagsfraktion-austermann-henke-eichel-will-bankgeheimnis-aushebeln.

73 Börsen-Zeitung, ‘Bayern moniert Eichel-Plan für Schuldenagentur; Faltlhauser: Länder und Bundesbank brüskiert – Zeitler: Rolle der Bundesbank nicht schwächen’, 18 Feb. 2000, p.5.

74 Welteke, quoted in Agence France Presse – English, 13 March 2000.

75 Bundesbank 2000, Haushaltsausschuss 14/1589: 1.

76 Finanzausschuss and Haushaltsausschuss, ‘Kurzprotokoll der 51.', p.67/22.

77 Ibid., pp.51/37, 67/37–51/40 and 67/40.

78 Ibid., p.67/44.

79 Barber, ‘Institution Is Slow’.

80 BSV, Stellungnahme zum Gutachten.

81 Beckert, ‘Agency, Entrepreneurs’; Sheingate, ‘Political Entrepreneurship’; Campbell, Institutional Change and Globalization.

82 Campbell, Institutional Change and Globalization, p.74, fn.13.

83 N. Fligstein, ‘Social Skill and the Theory of Fields’, Sociological Theory 19/2 (2001), pp.105–25.

84 Beckert, ‘Agency, Entrepreneurs’, pp.785–6; Sheingate, ‘Political Entrepreneurship’, p.189.

85 Beckert, ‘Agency, Entrepreneurs’, p.786.

86 Sheingate, ‘Political Entrepreneurship’, p.187.

87 Beckert, ‘Agency, Entrepreneurs’.

88 Ibid., p.779. Sheingate follows this concept of uncertainty: ‘Unlike risk, Knightian uncertainty describes a condition in which the probabilities of alternative outcomes cannot be generated. This kind of uncertainty is characteristic of complex systems.’ Sheingate, ‘Political Entrepreneurship’, p.191.

89 Sheingate, ‘Political Entrepreneurship’, p.191.

90 Ibid.

91 Beckert, ‘Agency, Entrepreneurs’, pp.787–8; Sheingate, ‘Political Entrepreneurship’, p.191.

92 For details see R. Deeg, Finance Capitalism Unveiled: Banks and the German Political Economy (Ann Arbor, MI: University of Michigan Press, 1999); S. Lütz, Der Staat und die Globalisierung von Finanzmärkten. Regulative Politik in Deutschland, Großbritannien und den USA (Frankfurt a.M.: Campus, 2002); S. Lütz, ‘Convergence within National Diversity: The Regulatory State in Finance’, Journal of Public Policy 24/2 (2004), pp.169–97.

93 Tagesspiegel, ‘Bundesfinanzminister plant Privatisierung – Deutsche Bundesbank fühlt sich übergangen’, 16 Feb. 2000, available from http://www.tagesspiegel.de/politik/bundesfinanzminister-plant-privatisierung-deutsche-bundesbank-fuehlt-sich-uebergangen/123814.html.

94 W. Streeck, ‘The Politics of Public Debt: Neoliberalism, Capitalist Development, and the Restructuring of the State’, MPIfG Discussion Paper 13/7 (2013), available from http://www.mpifg.de/pu/mpifg_dp/dp13-7.pdf.

95 C. Favero, A. Missale and G. Piga, ‘EMU and Public Debt Management: One Money, One Debt?’, CEPR Policy Paper No. 3 (2000), available from http://dev3.cepr.org/pubs/policypapers/pdf/PP3.pdf, pp.1–4.

96 Streeck, ‘The Politics of Public Debt’, p.1.

97 Bundesbank, ‘Trends in Public Sector Debt since German Unification’, Deutsche Bundesbank Monthly Report March 1997 (Frankfurt: Bundesbank, 1997), pp.17–31, at p.18. However, we also have to note that despite the burden of German unification, Germany was ‘not the worst performer’ as the average rate of rise in the debt/GDP ratio was even higher in France, Italy and Canada. Ibid., p.19.

98 Ibid., p.23.

99 Ibid., p.27.

100 Ibid., p.29. In 1996 the MoF issued for the first time papers with a maturity of less than one year (so-called Bubills).

101 Trampusch et al., ‘The Financialization of Sovereign Debt Management’.

102 C. Trampusch and D.C. Spies, ‘Was treibt Kommunen zu Spekulationsgeschaeften? Eine Analyse der Swap-Geschaefte von Kommunen in Nordrhein-Westfalen’, Politische Vierteljahrsschrift 56/1 (2015), pp.104–29.