German Landesbanks shifted into a new gear last week as the much-anticipated loss of state guarantees came into effect at the beginning of last week. As of last Tuesday, Landesbanks can no longer issue debt guaranteed by their respective states.

Landesbanks, wholesale banking institutions governed by public law, generally belong to one or more of Germany's 16 federal states. States have historically guaranteed their respective institutions, leading to very high ratings for Landesbanks. The loss of the state guarantee means that Landesbanks will face sharply steeper refinancing costs, but existing bonds are grandfathered, locking in the guarantee until maturity for all the banks' existing senior and tier II paper. "As such the ratings drivers will not be the financial health of the issuing institution, but rather that of the ultimate guarantor states, as well as the likelihood of timely support if needed," explained Ian Centis at Commerzbank.

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