COMPARATIVE ANALYSIS OF DEBT MARKET IN HUNGARY, GREECE, LATVIA, ITALY AND ICELAND Made by:

Gauri, Praneetha, Prashant, Prithvij and Ritu

What is a Debt Market

• A Bond Market ( Debt Market) is a financial Market where participants can issue new debt ( Known as Primary Market) or buy and sell debt securities ( Known as Secondary Market)

• The primary function of a bond market is to transfer capital from savers to issuers or organizations requiring capital for projects, business expansions and ongoing operations.

• The Bond market primarily includes government- issued securities and corporate debt securities.

• The Depth of a Market is defined by its ability to sustain relatively large market orders without impacting the price of the security.

• Therefore, a market would be considered deep if a large order is required to change the price of the securities issued.

HUNGARY

Bond Market in Hungary

2 Types of Bond Markets

I. Government Securities Market i. Two year Maturity

ii. Three Year Maturity

iii. Five year Maturity

iv. Ten year Maturity

v. Fifteen year maturity

II. Corporate Bond Market

Government Bond Market

•Developed and Mature Market. •One of the Most liquid markets in the Central and Eastern European Regions. • 2 main driving Forces

Need to reduce rollover forces: done by lengthening the maturity spectrum of bonds

Need to Mitigate exchange rate risk: Issuance of local currency denominated Bonds

•Earlier issuance of government bonds through private placement . •However, auctions have become a regular feature since 1996. •Currently, issuance of government securities through a primary dealer system Reduces financing costs Facilitates expansion of transparency of the

secondary market

Corporate Bond Market in Hungary

Not very deep compared to their government bond market

Exchange Rate Regime: Companies favored foreign currency debt as domestic interest rates were higher than the some of depreciation paths and foreign interest rates.

Hungarian Privatisation Strategy: Favoured sale of assets to professional investors and international financial investors.

Structural Problems: Lack of sufficient rating agencies and appropriate hedging instruments made corporate bonds risky.

Lack of Liquidity: issuance costs and pricing problems.

Current Scenario

• Financial Sector stability and covergence- related issues are facilitating well functioning of a corporate debt market. • Additional boost through development of derivatives

market (especially interest rate derivatives) • Credit Rating : Non Investment Speculative Grade

Standard and Poors : BBMoody’s : Ba1 Fitch’s BB+

Residency Bonds

•Hungary began issue of a new type of bond known as the “Residency Bond”•The residency bond grants permanent residency to foreigners and their family in return for investing in government bonds. • It also provides for a lifetime Schengen Visa. •Till date the government has sold 300 million worth of these residency bonds.

Italy

Overview of the Italian Debt Market• The main Italian debt securities market is the Mercato

Telematico delle obbligazioni e dei titoli di Stato (MOT), organised and managed by the ISE.

• The MOT is the market for trading bonds (other than convertible bonds), sovereign debt, Eurobonds, asset-backed securities (ABS) and other debt securities. It is divided into two segments:

• DomesticMot (for securities settled through the Italian settlement system).

• EuroMot (for securities settled through foreign settlement systems).

Requirements for trading in the market

•Minimum size requirements• There are no limits on the size of the issuer listed on the MOT. However, for

admission to listing, bonds must be:• Issued against debt whose outstanding amount is at least EUR15 million

except if otherwise provided by the ISE.• Distributed among non-professional investors and/or professional investors,

to an extent deemed adequate by the ISE to allow the market to operate.

•Trading record and accounts• The issuers must have published and filed, in compliance with national law,

stand-alone or consolidated annual accounts for the last two financial years, which must be accompanied by an auditor's opinion.

• Issuers must have appointed a firm to audit the stand-alone and consolidated annual accounts for the current year, at the date the application for admission to listing is submitted. There are no working capital requirements.

Types of Government Bonds in the Italian Market

• BTPs - Buoni del Tesoro Poliennali• Short term bonds• 3, 6, and 12 month periods

• CTZs – Certificati del Tesoro Zero Coupon• 24 month maturity• deep discount and pay no interest

• BOTs – Buoni Ordinari del Tesoro• maturities of 3, 5, 10, 15 and 30 years• minimum denomination of Euro 1000

• BTP Euro i -- Index-linked BTPs• maturity of 5, 10, 15 and 30 years• take into account rates of inflation in the Euro-zone as measured by the

Eurostat index Harmonised Index of Consumer Prices (HICP)

Corporate Debt Instruments• Plain vanilla bonds. • Debt securities paying fixed or floating interest rates. Such securities can

be secured or unsecured, senior or subordinated, and guaranteed or not.

• Convertible bonds. • These are debt securities that can be converted into a predetermined

amount of equity of the same issuer at certain times during their life.

• Exchangeable bonds. • These are debt securities of an issuer that can be exchanged into a

predetermined amount of equity of a third party at certain times during their life.

• Euro MTN. • These are flexible medium-term debt instruments generally issued with

maturities of fewer than five years and which are offered continuously, rather than all at once like a bond issue.

• Asset-backed debt securities. • These are bonds or notes backed by a pool of assets. Typically these

assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans, manufactured-housing contracts and home-equity loans.

• Structured bonds. • These are debt securities originating from a combination of two or more

elements, such as a plain vanilla bond and a derivative instrument.

• Eurobonds. • These are bonds issued in a currency other than the currency of the

country in which it is issued.

• Covered bonds. • These are bonds issued by banks guaranteed by a cover pool of mortgage

loans or public-sector debt, segregated in an Italian securitisation vehicle.

Condition of the Italian Government’s Debt

• Between 2009 and 2015, the ratio of Italian public sector debt to gross domestic product rose from 103.3 per cent to 132.6 per cent.• The main reason for the explosion in the debt ratio has

been the fall in nominal GDP – the euro value of economic output. • Italy lacks the policy instruments to improve this ever

deteriorating nominal GDP. • It has no domestic interest rate it could lower. • It has no central bank that could monetise its debts.• It has no exchange rate it could devalue.

ICELAND

Iceland Debt Market• The Central Bank of Iceland administers debt affairs and debt

management with the authorisation of the Ministry of Finance.• It does so in accordance with guidelines set by the Ministry. • The Minister of Finance decided to assign the tasks that were

handled by the NDMA to the Central Bank of Iceland. This changes took place on October 1st, 2007. 

Development of the Icelandic bond market

• 1934: Kauphöllin hf. begins sales of securities to individuals and businesses

• 1942: Landsbanki Íslands’ stock exchange begins operations, but closes two years later

• 1964: First indexed treasury bonds issued • 1976: Establishment of first dedicated securities house,

Fjárfestingarfélag Íslands. Others followed, including Kaupthing and securities divisions of Idnadarbanki and Útvegsbanki

• 1979: Banking institutions authorised to index their lending and, a year later, deposits

• 1984: Treasury bills sold by monthly auction from March to November. Deregulation of interest rates phased in from 1984-1986 1985: Iceland Stock Exchange (ICEX) established

• 1986: Central Bank of Iceland becomes market maker for treasury bonds

• 1987: Treasury bills listed on ICEX, with the Central Bank as market maker for them

• 1989: Electronic trading system launched at ICEX. First housing bonds issued and listed on ICEX, with Landsbréf Securities as market maker. Establishment of the Treasury Bonds Service Centre, later National Debt Management Agency

• 1990: Deregulation of capital movements phased in from 1990-1995 • 1992: Auctions of treasury instruments begin • 1996: Central Bank ceases to act as market maker, except for treasury bills • 1999: The Icelandic Securities Depository (ISD) established • 2000: Electronic registration of securities begins at ISD. ICEX introduces

the Saxess trading system and joins NOREX (Nordic exchanges’ cooperation framework). End to the geographical isolation of the Icelandic market. Primary dealers system set up, the Central Bank ceases to act as market maker.

Types of Governement Bonds • Nominal Treasury Bonds (RIKB) are coupon or zero coupon,

none-indexed securities issued by the Government Debt Management on behalf of the Republic of Iceland. Issues of Nominal Treasury Bonds listed on the NASDAQ OMX Iceland hf. 

Inflation-linked Treasury Bonds (RIKS) are long-term bullet bonds or coupon bonds issued by the Government Debt Management on behalf of the Republic of Iceland. The Bonds are index-linked to the Icelandic Consumer Price Index. 

Treasury Bills (RIKV) are zero coupon, none-indexed securities with maturity up to one year and issued by the Government Debt Management on behalf of the Republic of Iceland. 

Primary Dealers for Government Securities

• Islandsbanki, • Arion Bank,• Landsbankinn, • MP bank, • Straumur Investment Bank.

Fixed Income Securities• Issued by

• Icelandic Government (through the Central Bank of Iceland - Government Debt Management) and

• the state-owned Housing Financing Fund (HFF).

The Nominal Treasury Bonds are benchmarks for non-indexed bonds, while HFF bonds serve as indexed benchmarks.

The Government and the Housing Financing Fund have both signed agreements with Primary Dealers regarding market making  arrangement in benchmark series. The agreements have proven to be effective for the market, leading to increased turnover and liquidity for the benchmark series.

Icelandic Treasury securities can be purchased from Primary Dealers. They also provide custody services including regular statements of holdings and portfolio movements, and the monitoring of domestic and foreign securities i.e. dividends, bonus shares, mergers, interest payments and redemptions etc.

Bond Market in Iceland• Marketable bonds are transferable bonds offered for sale to

individuals and/or legal entities in an offering in which all the main features of the instruments in each class are the same, including the name of the issuer (debtor), first interest date, repayments, interest rate and calling as appropriate.• Treasury bonds are issued by the National Debt Management

Agency on behalf of the Treasury as a borrowing instrument in the domestic market for its own funding. Treasury bonds are with a longer maturity than one year either non-indexed or indexed against a consumer price index or foreign exchange.• Bank bonds are issued by deposit money banks. Such bonds can

be price-indexed, non-indexed or exchange rate-linked.

Housing Bounds• Housing bonds are issued by the Housing Financing Fund

(previously the State Housing Authority) to • finance its lending for the purchase or construction of housing.• finance the social housing system.• to finance cash loans for the purchase or construction of housing.

Housing Financing Fund comprise nearly 40% of the total market value of bonds listed on the Iceland Stock Exchange and bonds issued by the National Debt Management Agency are nearly 8.4%.

GREECE

Govt. Institutions in Greece• Ministry of Finance of Greece• Bank of Greece

Corporate Bonds• The Greek economy is still struggling, but with loans hard to

find companies are taking advantage of investor demand for high yields by issuing bonds.

• Hedge funds and private banks are seeking out bonds issued by Greek companies, which are tapping credit markets in increasing numbers. Among the buyers are York Capital Management, Dromeus Capital, LNG Capital and CQS LLP.

Greek Bonds

• Greek bonds and bills are issued through the Public Debt Management Agency (P.D.M.A.). • Nowadays, after European sovereign-debt crisis, Greece is

selling only T-bills. Also there are 21 government bonds with the maturity up to 30 years. • The level of Central Government Debt as of 31.03.2013, is

equal to €309.3 billion. The volume of Government Bonds is equal to €124 billion.• 2014: A debt restructuring had just wiped out more than €100

billion ($130 billion) in government bonds. The stock market stood at one-tenth its 2007 levels. 

• Ever since the October 2009 when the Greek Government finally faced up to the bond market pressures and admitted that its predecessor has falsified the national accounts, the euro area has been unable to shake off its sovereign debt crisis.

• the Greek debt to GDP ratio shot up from 98 percent at the start of 2009 to 133 percent of GDP in early 2010. 

• Currently, Greek debt to GDP ratio is175 percent of GDP, the highest in the world for any country with a fixed exchange rate.

•  "Greece has become a symbol of government indebtedness. …It cannot grow out of trouble because of fiscal retrenchment and its lack of export prowess. It cannot devalue, because it is in the euro zone.”

• Greece has defaulted on its sovereign debt many times throughout history. But the current crisis is much different because Greece is a member of the European Union (EU), and the debt-to-GDP ratios of Greece, Ireland, Portugal, Spain and Italy have become serious concerns.

Effects of the Debt Crisis• Greek GDP per capita declined 22.5% in real terms from the

end of 2007 through 2014, based on the latest estimates from the IMF. •  In Greece, state revenues fell 10.6 percent between 2007 and

2014, • Greek government expenditure was down 18.8 percent by the

end of 2014 compared to the end of 2007. • Since 2009, however, Greece deflated its labour costs by 26

percent 

Bailouts• As one third of the funds disbursed in both bailout programmes

was used to retire maturing debt.• Interest payments on debt swallowed another 1/6th of the entire

bailout. • In total, payouts to the private sector bondholders, banks

recapitalisations and debt swaps and interest payments used up 81 percent of the total lending to Greece.

Possible solutions

"Europe could become a transfer union, with the north giving more and more credit to the south and later waiving it." • "The south can deflate." • "The north can inflate." • "Countries that are no longer competitive can exit Europe’s

monetary union and depreciate their new currency.

• Greece may need a third bailout deal 

LATVIA

• In Latvia the fixed income market is small by international standards, yet it has developed a versatile legislative framework and adequate institutions. The Latvian fixed income market is formed by the governmental bonds, mortgage bonds, and corporate bonds. In 2008 these segments took s 73 %, 16 %, and 11 %, respectively. Government bonds strongly dominate the Latvian capital market in the aspect of both amount and liquidity. 

Development of Latvia's government bond market started in December 1993. Since 1999, government bonds have been actively traded at the Riga Stock Exchange. The attractiveness of Latvian government bonds is determined by the good country rating and the fact that the volume of the non-government bonds is not large. 

• One of the basic features of Latvia's capital market is the preference that non-financial enterprises have for banks' credit over the issuance of bonds. Bond yields are usually higher than credit interest rates, therefore issue of bonds is not attractive to companies. Banks are the most active issuers in the corporate bond segment. Many companies prefer attracting funds through closed issues of such debt securities that cannot be traded at the Riga Stock Exchange. • Debt securities of longer maturity are being issued, which is a

sign of stability in the market and can promote inflows of long-term investment from insurers and pension funds.

Domestic Securities• Latvian government securities are issued to ensure financing of the government

budget deficit and re-financing of the government debt, as well as liquidity of the government finances. Currently, the government securities are the main source of the government domestic funding.

• The issuer is the Ministry of Finance of the Republic of Latvia and the Treasury of the Republic of Latvia performs all transactions with government securities.

• The government securities fall into three groups according to their original term-to-maturity:

• Short-term T-bills - securities with original term-to-maturity one year or less;• Medium-term T-bonds - securities with initial repayment term over one year but

not exceeding five years;• Long-term T-bonds - securities with initial repayment term longer than five years.• The government short-term T-bills are sold at a discount and their nominal value is

repaid on the maturity date. The government medium-term and long-term T-bonds are sold with semi-annual or annual coupon payments and their nominal value is repaid on the maturity date.

2000-07 Debt Crisis• The main drivers of this increase in indebtedness were Latvia’s

transition towards a market-based economy, abundant liquidity, low interest rates—particularly on borrowing in foreign currency—and the free flow of capital and labour following Latvia’s accession to the EU in 2004.

• As a result, Latvia’s indebtedness reached 116 percent of its GDP in 2007 compared to under 35 percent of GDP in 2000.

• The main cause was rapid build-up of private sector indebtedness, most of it in foreign currency, funded by foreign borrowing by domestic banks and corporate borrowers.

• The debt service burden has declined due to lower euro interest rates and extensive debt restructuring by banks, while a recent analysis by Swedbank Latvia argues that the average monthly payment for a household mortgage has declined by 20–30 percent.

Accession to EU• EU membership in 2004 sparked a credit boom in Latvia, but

the global financial crisis in 2008 dried up funds overnight.• But by late 2010, the economy was growing again. In 2012, it

expanded 5.6%, the fastest of any country in the EU, although it has not reached pre-crisis heights. Foreign investors remain cautious about pouring money into a country where there is a chance of devaluation. • Therefore, Latvia which conducts 70% of its Foreign Trade

with Eurozone Countries decided to adopt the EURO in January, 2014 which resulted in immediate improvement in the country’s credit rating.• Latvia issued its first saving bonds after adopting Euro as its

currency in 2014.