NORD/LB Structured Finance Europe Mathias Pahlke Head of Infrastructure Europe 22nd March 2012

Impact of Contextual Aspects of Public Sector Debt Crisis12. Betriebswirtschaftliches Symposium PPP 2012 – Weimar NORD/LB Structured Finance Europe Mathias Pahlke Head of Infrastructure Europe 22nd March 2012

Impact of Contextual Aspects of Public Sector Debt Crisis Agenda 1. Introduction to NORD/LB Structured Finance. 2. Capital and Financial Markets in Turmoil. 3. Are the Banks to take the Blame? 4. The Impact on Public Sector. 5. A Conclusion …

NORD/LB at a glance Established commercial bank in northern Germany. • Successful universal bank for nearly 250 years in the market. • Market leader in the north of Germany in its business units private, commercial and corporate customers. • Excellent knowledge in the area of Renewable Energy and Infrastructure Projects. • Arranged / financed project finance throughout the crisis with debt terms of 25 yrs +. • More than 30 years of experience in ship and aircraft finance. • Deutsche Hypo is the established competence centre for commercial real estate finance within the Group. • Based in all important financial centres worldwide. • Member of the extended Guarantee Funds of the Landesbanks and savings banks. • Through the crisis by internal strength, no use of state-aid.

Strong support from our owners. NORD/LB at a glance State of Saxony-Anhalt Savings banks association in Lower Saxony State of Lower Saxony Savings banks holding association in Saxony-Anhalt Special purpose holding association of the savings banks in Mecklenburg-Western Pomerania • The „Länder“ state treaty fixes the legal position of the bank. • 1992/1993: The states of Saxony-Anhalt and Mecklenburg-Western Pomerania and their savings banks holding associations have become new additional owners. 4 4

Social Infrastructure: Education (e.g. Schools, Universities…), „Blue Light“ (e.g. Fire Stations, Police Stations, Hospitals…), Accommodation (e.g. town halls, social housing, libraries, barracks…). Waste Management/Recycling Economic Infrastructure: Roads, Rail, Train Stations, Street Lighting, (Municipal) Networks, Rolling Stock. NORD/LB at a glance Our core sectors in Infrastructure:

2. Capital & Financial Markets in Turmoil Current Capital and Financial Market Turmoil Does this mean we have a … ? • a public debt crisis … or • a bank crisis … or • a EURO crisis … or • a crisis of social welfare / tax evasion? What came first ? Is there still a problem ?

2. Capital & Financial Markets in Turmoil Is there still a Problem ? Quelle: Bloomberg

2. Capital & Financial Markets in Turmoil History Excurse - What happened back in 2007? • US House prices stopped rising as interest rates increased. • This lead to defaulting mortgages. • This lead to defaulting credit derivates. • Both lead to Banks incurring losses. • Lehman Bros fell and AIG almost. • Interbank trust broke down. • Bank to bank lending dropped to a minimum. • Short term liquidity expensive and long term not available. • More Banks fell into trouble.

2. Capital & Financial Markets in Turmoil History Excurse - What happened back in 2007? • Public Sector step-in. • Rescuing banks and injecting capital / Rescue Funds. At the same time the Public called for new RULES / REGULATION: • Basel III – asking for more equity and running stress tests. At the same time, the Rating Agencies woke up • downgrading banks (and states) rigorously.

2. Capital & Financial Markets in Turmoil Volatility and Cost of Debt: Quelle: Bloomberg

2. Capital & Financial Markets in Turmoil Resulting in big variances of Risk Perception: Quelle: Bloomberg

3. Are the Banks to take the Blame? … and will it end when the Banks are ok again? Buying Government Bonds is safe Government can raise taxes or print money But EU Competitive & ECB prints money EU, € & ECB = all members are equal EU Members are in trouble now What will happen to individual EU Members ? €

3. Are the Banks to take the Blame? Banks are reacting. Quelle: FAZ v. 03.03.2012 Quelle: Bloomberg

3. Are the Banks to take the Blame? The Effects of Current Market Turmoil on Banks. Debt Market Crisis • Availability of (long-term) funding • Cost of (long-term) funding • Volatility of funding cost Basle III – Regulation Changes • Net funding ratio requirements (matched funding) • Higher Equity Ratios required • Higher requirements for risk assessment – Risk Weighted Assets Banks have to reconsider – what is good business? • What kind of Borrower ? • At what price? • For how long?

4. The Impact on Public Sector How does this affect the Public Sector ? • Banks still are important provider / arranger of public debt. • Public Sector incurred high amounts of Debt. At the same time: • Tax income has been reduced by economic downturn. • Social welfare payments have increased with unemployment rates. • EU is introducing the Debt Brake (“Schuldenbremse”). • Less and less deficit spending. • This will lead to some municipalities filing for bankruptcy if they do nothing.

4. The Impact on Public Sector Banks as Key Provider of Public Debt. Traditional public debt is less attractive: • Long term vs. matched funding. • Use of RWA increased due to long tenors. • Introduction of different credit covenants for different public sector entities. • The Debt Brake in a new light.

4. The Impact on Public Sector Comparison of Base Rates – before / today 1,6 – 1,7%

4. The Impact on Public Sector What could Public Sector do ? • Cutting public spend. • Cutting social welfare. • Cutting public services. • Cutting public investments. • Selling public assets. • Incurring the debt outside their budget.

4. The Impact on Public Sector What is to do to get out ? • Backward • Do nothing • Forward

4. The Impact on Public Sector Backwards No restriction on Public Debt. • Capital markets lose faith that Public Sector is able to reduce deficits. • Debt spirals and inflation risks rise. • No incentive for politicians to level out their budgets. • Public spending may stay at a high level. • Social welfare may stay at an “acceptable” level. • There will be another EU-wide crisis when the next (bigger) bubble bursts. Break up the European Union • No idea. • Astronomical cost. • Other Consequences too manifold to predict the benefit. • There will never be another chance for a united Europe again.

4. The Impact on Public Sector Do nothing… • Ignore the Debt Brake and hope for the best. • Ignore the need to improve the relation between tax income and public spending. • Ignore the regulation of Basel III. • Direct steer for the next Public Debt Crisis as interest rates will rise again. • You need to think about alternatives “Backward” and “Forward” again.

4. The Impact on Public Sector Forward • Find new sources of funds (not debt) – e.g. Public Private Partnerships. • Find new tools for funding – e.g. rated bonds for municipalities, joint bonds for public sector (e.g. Financial Equalisation Scheme (“Länderfinanz-Ausgleich”) for municipalities of a region, Euro-Bonds). • Reduce public sector debt and cost and improve the stability of income. • PPPs are not for everyone but current discussions are blind and stupid. • Euro-Bonds are not liked by “rich Northern states” and difficult to pass through parliaments / public opinions. • Saving and keeping up public services is always very difficult.

5. A Conclusion… Conclusions… • The (private) Global Investment Community is richer, faster and less emotional about investing money (without bad conscience) than all governments combined. • Do nothing is no viable option. • Backwards is not an option for long and would not benefit the Europeans. • Politicians need a lot of will-power and constructive mechanisms / incentives to work together, stabilise economies and bring together productivities and welfare. • Therefore, we do not have a real alternative to: • Euro-Bonds (and their “smaller siblings” on lower levels). • Reducing public sector cost and paying sufficient taxes. • Using investment alternatives such as PPPs.

Impact of Contextual Aspects of Public Sector Debt Crisis Thank you for your Attention! Your Contact: Mathias Pahlke Head of Infrastructure Origination Europe NORD/LB Norddeutsche Landesbank Girozentrale Friedrichswall 10 30159 Hannover Germany Tel.: +49 (0)511/ 361-8626 Email: Mathias.Pahlke@NORDLB.de Bitte hier Ihr Foto einfügen

NORD/LB Structured Finance Europe Mathias Pahlke Head of Infrastructure Europe 22nd March 2012