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Allianz: EFSF Bond Insurance Plan Gaining Traction In Europe

Dow Jones - Stephen L. Bernard

Posted on 12 Oct 2011

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With time running out to finalize the euro zone's bailout fund, a plan by giant German insurer Allianz to turn the fund into a bond insurance program is gaining traction, the company's top executives said Tuesday.

The proposal to turn the European Financial Stability Facility into a institution that protects investors against a portion of losses has garnered support from other major European insurers and banks in the region, Paul Achleitner, the proposal's architect and a member of Allianz's board of management said during an interview with the Wall Street Journal and Dow Jones Newswires. After initial setbacks, the plan is now also being taken seriously by euro zone governments, Achleitner said.

With EUR450 billion in global insurance assets and EUR1.5 trillion in overall assets under management, Allianz is the continent's largest investment institution.

"Don't use the EFSF as a lender, use it as a bond insurer," said Achleitner, who added that his plan would expand the impact of the EFSF, which currently has a lending capacity of 440 billion euros, to cover more than EUR3 trillion in bonds. That estimate assumes that 20% of the debt issued is insured and that it draws upon the full EUR780 billion that euro-zone governments have agreed to guarantee as backstop to the EFSF.

Achleitner, who was flanked by chief executive Michael Diekmann, said Allianz SE has been working closely with Deutsche Bank on the proposal in what have so far been mostly closed-door discussions. The program has the support of other insurers like Munich Re and some big French banks, among others, he said. It has recently been promoted by Goldman Sachs International Chairman Peter Sutherland.

Munich Re generally supports the Allianz proposal, which it considers to be a sensible one, but such a solution should be based on clear conditions, a spokeswoman for the company said.

With those institutions' support, Allianz is in close consultation with members of the so-called "troika"--the European Central Bank, the European Union, and the International Monetary Fund, Achleitner said.

Spokespeople for Deutsche Bank and the ECB declined to comment. The French and German finance ministries did not immediately respond to requests for comment.

Diekmann said the plan would not involve recapitalizing European banks, which he said was a matter best handled by individual governments rather than the EFSF.

When it was first proposed six months ago, Allianz's plan was dismissed by the German government, the biggest and most influential contributor to the EFSF. At that time, people familiar with the German government's thinking said the proposal was too unwieldy and faced legal hurdles.

But Achleitner said questions about European Union treaties that ban sovereign governments from directly guaranteeing the debt of other members have since been resolved. Exemption clauses for emergencies would get around those restrictions, he said.

He added that the proposal should be attractive to governments in the region because it would share the risk of backing European sovereign debt between taxpayers and private investors. The region's strongest countries would no longer be on the hook for covering 100% of bond losses, while investors could make calculated investments depending on the size of coverage on each bond, he said.

Another advantage of the plan, Achleitner said, is that European officials could tailor the pricing and insurance rates to set appropriate incentives for both bond investors and sovereign borrowers. Governments could determine how big the losses would need to be on newly issued bonds before the insurance kicks in. In this way, it could be used, for example, in a bond swap with holders of existing Greek debt to ensure that what many see as an imminent default is not structured to encourage other struggling sovereigns to demand a similar deal.

"The beauty of this instrument is you can hone and deploy it [to get the] best bang for your buck," Achleitner said.

And unlike the current EFSF model, which relies on the facility earning a Triple-A rating with which to raise money cheaply in world markets, "under this plan the EFFS doesn't care about being a Triple-A rating," he said.

The primary advantage, however, is that it expands the breadth of the EFSF at at time when the market is increasingly worried that the facility is not big enough. Investors worry that the EFSF's EUR440 billion lending capacity would be exhausted if big countries such as Spain and Italy were to demand a bailout and, additionally, withhold their own guarantees from the facility.

Under its current construct, the EFSF could cover 70% of Greece, Portugal and Ireland's debt but if Spain and Italy eventually tap the bailout fund, the coverage ratio would drop to 10%, Achleitner said. He added that his plan would "easily" finance these five most indebted countries for the next five years.

Urgent action is required by the euro-zone governments, said Diekmann, who added that a plan needs to be in place in time for the Group of 20 summit, which begins on Nov. 2.

"The Europeans have to align of a lot of interests, but [they] are running out of time" said Diekmann.
Asked what Allianz stood gain from this plan, Diekmann said that as "the biggest investor in Europe," his firm has a direct interest in improving the performance of the region's asset markets.