Central and eastern European sovereigns have bounced back from the setbacks of the last year. Individual countries now want to be judged on their own merits, not simply in regional terms. Many are planning extensive forays into the debt markets in 2010 and some are already ahead of the game through pre-funding.
The drop in confidence in central and eastern Europe a year ago, was unfounded, say finance ministers in the region, given the low level of bank writedowns. Markets should differentiate between countries and not merely lump them all in together.
Tapping international markets remains very important to sovereigns in the regaion who want to diversify their investor bases beyond domestic buyers.
For those with heavy financing plans for 2010, pre-funding strategies are proving popular, to beat the inevitable rush in the new year.
Jonathan Brown, head of emerging markets and European credit syndicate, Barclays CapitalLaszlo Buzas, deputy CEO, government debt management agency (AKK), HungaryMarc Giesen, head of debt capital markets, central and eastern Europe, Royal Bank of ScotlandZdenko Krajcír, director, Financial Policy Institute, Ministry of Finance, the Slovak RepublicRadek Leatka, spokesman, Ministry of Finance, the Czech RepublicJürgen Ligi, Minister of Finance, EstoniaBojan Pleec, acting director of Treasury Directorate at Ministry of Finance, SloveniaUlrik Ross, head of European public sector debt capital markets, HSBCDamyan Staykov, head of issues division, Government Debt and Financial Markets Directorate, Ministry of Finance, BulgariaAnna Suszynska, deputy director, Public Debt Department, Ministry of Finance Republic of PolandChris Tuffey, managing director and co-head of credit capital markets, Credit SuisseAudrius Zelionis, director, State Treasury Department, LithuaniaModerated by Toby Fildes and Katie Llanos-Small of EuroWeek
Participants in the roundtable, which took place in December, were:
EUROWEEK: Despite the turmoil over the last 12 months, central and eastern European sovereigns have re-established themselves in the domestic and international capital markets in 2009. Were you surprised by the speed of the markets recovery?
Staykov, Bulgaria: For us rather a surprise is the overall volumes that have been placed successfully for such a short period of time.
Nowadays we see that there is a window of opportunities on international capital markets and it is a question of a prudent choice to capture, take advantage of that time.Leatka, Czech Republic: We were not much surprised by the speed of the recovery since a weak market performance of the Czech sovereign bonds especially in Q4 2008 and Q1 2009 was not consistent with macroeconomic fundamentals of the country and we expected a return to normal levels at some stage in 2009.Ligi, Estonia:We felt that the initial drop in confidence in this very diverse region was somewhat unfounded, particularly if one compares the original rollover risk forecasts and the real outcome as well as minimal occurrence of bank writedowns in most countries in your survey. We were very unhappy with the markets reaction of bundling together the whole region and not differentiating countries.Buzas, Hungary: After the Lehman collapse things at first glance looked worse than they really were. So we expected that there would be a second glance, and a more diversified approach to different borrowers. We also took a proactive approach by buying back debt in large quantities helping investors, who wanted to leave our market, to make an orderly exit. The outcome has been very much in line with our expectations. Today we sell more bonds in the domestic market than we did before September 2008.Brown, Barclays: I was surprised at the speed of return for CEE sovereigns, but the investor base for emerging markets moved from low rated products, structured trades and illiquid products into liquid sovereign risk. The investor base changed from the real money European convergence universe to a broader emerging market base.
At the same time, many of the EM sovereigns were robust against the global crisis and could present a compelling credit story at a time when developed economies were in flux. Issuance volumes have still been modest compared to both EM and high grade comparable sovereigns and dedicated EM investors had a lot of cash to invest from the spring of 2009 onwards.Zelionis, Lithuania:The market is still very volatile, so the current recovery might be temporary. However, the positive investor sentiment and returned risk appetite have paved the way for the CEE sovereigns to access the international capital markets, and Lithuania is no exception. We fulfilled our promise to the investors to be present in the markets.Suszynska, Poland: We were active in our domestic market all the time, adjusting, of course, our offerings. There were, of course, some difficult periods, e.g. October/November of 2008 when foreign investors were selling huge amounts of our domestic bonds they had in their portfolios. However, the domestic market had enough capacity to absorb it without creating any substantial distortions (in 2009 foreign investor have returned to our zloty denominated debt market and bought far more of bills and bonds than the amount they sold previously).
In regard to the international market, we issued bonds in the euro market in January 2009. Of course, we had to accept much higher spreads than in the past, but the demand was there and we were able to raise funds from international capital markets all the time.Giesen, RBS: CEE sovereigns have indeed been successful accessing capital markets throughout 2009 and have benefited from strong investor support. While CEE sovereigns have demonstrated effective pragmatism and flexibility over the year, they have also been helped by the perceived implicit support of their EU membership, and their strong credit fundamentals versus other sovereign credits. Unsurprisingly, we have also seen greater investor differentiation between sovereign credits within the region itself, with Czech and Poland (and eurozone members Slovakia and Slovenia) being perceived to be in a much stronger position than some of their neighbours.
As to the speed and extent of recovery, it is worth noting that a number of the CEE sovereigns who accessed the markets in the first two months of the year did face a more challenging market. This was a market-wide phenomenon rather than CEE-specific, but it did result in shorter-dated deals and shorter-dated issuance. In this context international investors did withdraw to an extent from local currency debt and preferred to invest in hard currency debt issues rather than in local markets.
The speed of recovery and the length/duration of this spread contraction are, however, interesting, with issuers like Poland, Czech, Slovakia and Slovenia now trading inside the secondary levels of Ireland and Greece.Zdenko Krajcír, Slovakia: The markets recovery is perceived as an important and positive step towards stabilisation of the whole economy. The situation on financial markets was partially affected by panic and negative expectations. The stabilisation in the markets reflects the situation in the real economy.Pleec, Slovenia:The speed of recovery that was seen in the financial market was, for the Ministry of Finance of the Republic of Slovenia, quite a surprise.
From the beginning of the year when markets were extremely turbulent they came down quite quickly, which we took advantage of to launch our most recent transaction in September.Ross, HSBC:In general, we were a little surprised by the speed of the recovery. Investors still want triple-A but after the market stabilised investors were prepared to look beyond this and the CEE region offered investors the best alternative value.Tuffey, Credit Suisse: Frankly I was more surprised by the size of the sell-off in late 2008 and Q1 2009, however the speed and size of the reaction from the worlds central banks has been key to the performance of markets later in the year.
With fears of failed government auctions in core Europe and calls for recapitalisations of some of the major banks in Q1, the outlook wasnt great but with the additional liquidity and very low rates the rebound was about when not if.
EUROWEEK: Ulrik, what have been the main supply/demand drivers in 2009, and how do you see that continuing in 2010? Ross, HSBC: The main driver has been the desire to optimise the improvement in markets, spreads have come out on all asset classes and CEE regions look like good value compared to core European countries. Those investors that have taken the opportunity have been right and we expect 2010 to be no different.Tuffey, Credit Suisse: The supply side is likely to increase as tax revenues drop and fiscal stimulus is needed. Investors will focus more on relative value and differentiate between names accordingly. Also domestic markets will be key. I expect local currency volumes to be higher in 2010 than 2009.Brown, Barclays: Supply will increase modestly from the CEE issuer base in 2010, but the demand pattern should remain the same or improve slightly. Pretty much every issue has performed well, which makes it easier for the issuers to return next year. The key risk will be crowding out from developed nations that have huge funding needs, as well as emerging nations that will offer higher yields at a time when risk appetite could be increasing.Giesen, RBS:The main supply drivers from CEE sovereigns have obviously been increasing budget financing requirements, combined with significant redemption requirements. Furthermore, as the market continued to improve over Q3 and Q4, a number of issuers started to prefund their needs for 2010.
For example, Slovenias 15 year prefunding trade in September was intended to prefund some of their 2010 requirements and lock-in the historically low base rates, significantly reduced credit spread levels and abundant liquidity.
In addition to redemption and budget financing requirements, an additional driver for international syndicated bond issues has been an effort to relieve pressure on domestic markets with a subtle shift into a greater proportion of international financing.
We expect increased supply from the CEE sovereigns in 2010, on the back of continued significant budget financing requirements and focus to shift from domestic to international financing. Following the Dubai developments in late November, we do anticipate investors will make a greater differentiation between sovereign risk and quasi-sovereign risk.
EUROWEEK: Bojan, how have your funding needs changed this year and how has that affected your funding strategy?Pleec, Slovenia:At the preparation of the Programme of Financing for the year 2009 at the end of 2008 we expected to have borrowing needs for the year 2009 of 0.9bn and the prefinancing limit would be 1.8bn. We had expected to execute that programme with two long-dated bonds totalling 2bn. The rest of the programme would be executed with T-bills and liquidity borrowing.Due to two rebalances of the budget by Parliament this year we needed to update our Programme of Financing twice. We had to increase the number of bonds from two to three and decided to increase the benchmark size of our bonds from 1bn to 1.5bn.
All our bonds issued this year were syndicated which, since 2007, has been our preferred method of issuance.
Short dated securities (T-bills) were issued via auction like in previous years. One of the changes that we implemented in our strategy this year was in the structure of the bond syndicate. With our second issuance we increased the number of lead managers from two international banks to three.Leatka, Czech Republic:Due to the budget deficit touching much higher levels than planned in 2009 we estimated the gross borrowing requirements to reach roughly double the planned Cz123.4bn by the end of 2009.Krajcír, Slovakia:The funding needs in Slovakia have slightly increased due to automatic stabilisers and fiscal rescue packages. Thus, these funds were used to stabilise and support of the economy. Despite the increased funding needs, the state debt and liquidity in Slovakia is being managed under standard conditions without support of any international institution. Ligi, Estonia:The funding needs have definitely changed. But in the case of Estonia this does not mean any change in the markets access strategy. Our fiscal deficit is small compared to the other countries and as the current market pricing is by no means attractive, we have used the reserves accumulated during the economic growth years to finance the deficit. Estonia also has the lowest public sector debt in the European Union.
Estonia will also exit the crises with the lowest public debt level in the EU.Staykov, Bulgaria: Maintaining a budget surplus in the range of 1.5%-3.5% of GDP since 2004 resulted in the accumulation of a significant fiscal reserve which predetermined the lack of a necessity for additional debt financing. Our forecasts indicate that at the end of this year the budget will achieve a close to balanced position. Having no or small deficits to finance, our emphasis was placed on the development of the domestic debt market. The issuance of securities on the domestic market was aimed at increasing the liquidity and transparency of the market and at broadening the investors base.Zelionis, Lithuania:The financial crisis dramatically changed our borrowing plans in 2008. We were not able to fund ourselves in the international markets at reasonable levels, so we relied on the domestic market and some private placements. The beginning of 2009 was not easy either, as the domestic market was not deep enough, and our funding needs more than doubled. Loans from international financial institutions (such as European Investment Bank) covered only a part of our funding needs. The market sentiment towards the Baltic States was improving very slowly, which meant that the 500m Eurobond launched in June was quite expensive, but at the same time very important, evidencing Lithuanias return to the international capital markets.
The next bond, a $1.5bn deal in October, proved that investors had confidence in our credit, and we kept our promise of offering the market liquid, benchmark-sized bonds.Buzas, Hungary:In 2009 the net financing needs amounted to around Huf1,000bn (3.6bn), which was met in part by a loan package provided by supranational institutions, and in part via the T-Bill market.
Since the successful re-opening of the domestic bond market in April 2009 an even larger part of the financing needs has been covered by market-based financing.Suszynska, Poland: Our funding needs, like most other countries, increased this year. However, the rise of borrowing requirements itself only had a moderate effect on our strategy.
We rely predominantly on the domestic (Polish zloty) market, where we raise the vast majority of the funds we need. This year it was almost 80%, but in previous years the ratio was higher.
In this sense, the role of international funding slightly increased in 2009.
We were present in all major markets that we have tapped in the past, i.e. euros, US dollars, Swiss francs and Japanese yen.
The second aspect of our funding strategy that was affected by the global situation in financial markets, including increased borrowing requirements on our side, was the maturity structure and type of instruments offered.
We have adjusted our issuance policy to market demands domestically we issued more short-term T-bills, internationally we also offered instruments that suited investors needs at the time.
EUROWEEK: What role will the international capital markets play in your funding plans next year?Krajcír, Slovakia:Tapping international markets is important for the diversification of investor bases. In compliance with the state debt management strategy, there is a Eurobond issue every year including 2010. Suszynska, Poland:Our policy towards international capital markets will remain very much similar to that of this year. As already mentioned, our main funding source is the domestic market, i.e. instruments denominated in Polish zloty. International capital markets may be perceived as an auxiliary funding source, looking from the perspective of absolute volumes raised. However, a regular presence in major markets and ability to issue there is very important from a strategic point of view. In a way, its a kind of insurance stabilising the domestic market in times of increased needs we can use international funding and not oversupply domestic markets. In fact our debt management strategy explicitly assumes such a flexible approach we can issue more internationally if the market situation is favourable and decrease our domestic debt supply, or vice versa.
In 2009 we have raised internationally more than we actually needed for principal and interest payments in foreign currencies. Additionally, we keep in mind the need for continued diversification and broadening of the investor base.Zelionis, Lithuania:For a number of years, Lithuania has been accessing international capital markets, offering at least one Eurobond a year. These markets will remain very important for the country. Around two thirds of the borrowing requirement should be covered in international markets, while the rest is done domestically. Buzas, Hungary: Usually, only 8%-10% of our gross issuance is done in the international capital markets, so its significance can be attributed to the diversification, i.e. we can reach foreign investors, who are unwilling to invest in the local currency debt.
As we have limited international financing needs in foreign currencies in 2010, there may be one or two transactions from the Republic of Hungary.Pleec, Slovenia:As we expect to continue to issue our long dated syndicated bonds we also expect that majority of our issuance will be placed with international investors. Placing our bonds with international investors is becoming more and more important as the financial market in Slovenia is quite small and we do not want to crowd-out other issuers.
But we of course also believe that domestic investors are still an important investor base for our bonds.Staykov, Bulgaria:The Bulgarian Ministry of Finance is thoroughly analyzing the possibility of issuing securities on the international capital markets next year. The possible proceeds from these issues would mainly be used to maintain sufficient liquidity and support the competitiveness of the economy. Any such issue would have an objective to add to our fiscal reserve at a lower cost, to extend our sovereign benchmark and to diversify further the investor base. The possible issue on the international market in favourable conditions could also reduce the borrowing cost in the domestic market.Leatka, Czech Republic:Though a substantial part of our funding needs is covered by domestic bond auctions, international markets play an important role helping the ministry to diversify funding sources and broaden the investor base. How much we will use the international markets in 2010 will depend on market conditions and budget funding needs.
EUROWEEK: Credit spreads have fallen sharply through the course of this year. Are you confident that "front-loading", or funding at the beginning of the year, is the right strategy?Buzas, Hungary:With new portfolio allocations scheduled usually at the beginning of the year, for those who have a heavy financing plan there is no alternative to front-loading. However, with our limited international financing needs in 2010, we can wait until the appropriate window of opportunity.Giesen, RBS: Looking at 2010, it is hard to see policy rates getting much lower, given increasing sovereign leverage and the expected reversal of various liquidity measures by central banks, and we would therefore expect front-loading of financing requirements to be a popular strategy for 2010.
We also believe that in the current environment, individual sovereign issuers need to do all that they can to demonstrate continued ease of access to the markets, to maintain a virtuous circle of investor confidence and declining credit spreads. The long-term benefits of demonstrating strong market access, locking in low base/swap rates and reducing any uncertainty in the funding programmes outweigh the shorter-term benefits of betting on potentially lower credit spreads later in the year. We therefore expect most sovereigns to continue to want to break the back of their funding needs during the first half of 2010, provided market conditions are benign.Ligi, Estonia: If we compare Estonia to eurozone countries with much deeper deficits and higher debt levels, it is clear that accession to the euro, which we want to achieve by 2011, is going to be the most important element in our future strategy regardless of whether the government itself needs to borrow in the markets or not.Tuffey, Credit Suisse:It is the most flexible strategy. Demonstrating that you can borrow through the cycle, in good times as well as bad, shows a more mature and sophisticated approach. No one has a crystal ball to know what spreads/yields are going to do but if you ignore opportunities and conditions deteriorate the consequences are much worse than if spreads tighten and you have funded. Leatka, Czech Republic:It can be the right strategy depending on the market conditions and development of funding needs of the respective sovereign. During a severe financial crisis it is difficult to predict the state budgets revenues and expenditures. Sufficient financial reserves could be therefore needed. Staykov, Bulgaria:The beginning of the year has usually been the period with highest liquidity and busiest in terms of sovereign bond issuance. In the current Government Debt Management Strategy the various ways of financing that could be used have been taken into consideration for the next year. The availability of a significant fiscal reserve affords us an opportunity to choose the most favourable point of time for commencing new bond issuance.Krajcír, Slovakia: By front-loading, the government aims to lower the risk of higher interest costs and worsened fiscal performance. In times of crisis and uncertain conditions this strategy is justified and helps to overcome potential liquidity outages.Ross, HSBC: We expect there to be an increase in supply for the public sector in 2010 of around 10%-15%. We believe that there will be a strong issuance calendar from the beginning of 2010 and with an expected flattening of the yield curve we expect both issuers and investors to see value in issuing/investing in long dated maturities from the beginning of next year.Suszynska, Poland:The beginning of each year usually brings a wave of new funds, new limits, in essence new money to be invested. For the beginning of 2010, we plan to remain flexible, adjust our offer to market demand and use potential opportunities.
There is still a lot of uncertainty over how the markets will behave next year, so given the quite favourable feedback we received from our partners (banks we co-operate with and major institutional investors), we decided to do some prefunding. It was not on a massive scale, rather it was business as usual (every year we do some prefunding of payments due in the beginning of the following year its a standard practice, as we have to manage our debt on a constant basis). This year we have already reached 100% of our target and we still have some auctions scheduled in domestic markets and we have not excluded visits to foreign markets, subject to market conditions.Brown, Barclays: On balance, credit spreads can improve slightly, but this will be compensated for by increasing government yields. Funding early will lock in low historical yields and more importantly will avoid the competing supply and re-pricing risk that some developed sovereigns will provide.Pleec, Slovenia:In the case of Slovenia in 2009 we decided to prefinance some of the 2010 budget. One of the reasons for prefinancing was the good trading level of our previous bond. This will give the Republic of Slovenia additional flexibility at the beginning of 2010 to find the right window for issuance. Zelionis, Lithuania:In the volatile markets over the last 24 months, front-loading has proven to be a wise strategy. Accumulation of some cash balances at the end of 2007 helped the Lithuanian government to weather out the turbulence in 2008. Accumulated cash balances at the end of 2009 will help to retain liquidity in 2010.
EUROWEEK: What steps should sovereign issuers be taking to diversify their sources of funding? Is there any demand for currencies other than US dollars, or newer structures? Brown, Barclays: Steps in 2009 to establish or revive relations with dollar investors will be key again. Yen and Swiss franc markets can also develop, but it will be crucial to continue to build out a full dollar yield curve. We expect euro issuance to be limited until the investor base is convinced by the liquidity of deals and the universe of buyers increases further from what we observe today.Tuffey, Credit Suisse: Steps are twofold firstly penetrate the markets that you already access more fully by having an aggressive investor relations strategy and undertaking regular investor contact. Look to get international investors involved in local markets, potentially at changes to make it more attractive (settlements, tax etc). Secondly look to more innovative structures, currencies etc for example this could be as simple as FRNs, inflation-linked bonds or markets outside of local, dollar and euro currencies.Ross, HSBC: We recommend that CEE issuers maintain their current focus of building a core issuance strategy in a liquid yield curve in euros. However, as the dollar market has proven from time to time to be more price-efficient, and many specialised investors in the CEE regions have many direct investments in dollars, it makes sense to focus on this currency. However, as we see the funding budgets for CEE issuers grow it makes sense to consider diversifying further into currencies such as yen and Swiss francs. Weve also seen that many have considered accessing the inflation-linked market.Giesen, RBS: We have seen a breakthrough this year, with several CEE sovereigns turning to the US dollar market to raise larger amounts than were possible in the euro market.
Lithuania in particular demonstrated the pent-up demand that exists from the US investor base for diversification in the sovereign sector. Other examples are Poland which came with a very large US dollar deal while additionally issuing in other currencies, and, most recently, the Czech Republics highly successful Swiss franc issue.
We believe that 2010 will see a continuation in the trend of CEE sovereigns looking to other currencies than the euro to provide a more diversified funding base, and we expect to see sovereigns focusing on the Swiss franc, sterling and Samurai markets, in addition to US dollars.
EUROWEEK: And what diversification for the issuers?Zelionis, Lithuania: The crisis and closed international markets turned us to financing of investment projects via loans taken from international financial institutions (e.g., EIB, NIB, CEB). Talking about further diversification, our funding needs are comparatively small in the context of the European Union and therefore we would not be able to offer investors liquid instruments in many currencies or markets.
However, the recent dollar deal was a very important step to broaden our investor base and deliver investors a comparatively liquid benchmark. We remain flexible to other currencies and markets, but no new structures are being discussed.Leatka, Czech Republic:The Ministry takes diversification of funding sources and broadening the investor base very seriously. In addition to regular domestic Czech crown bond auctions, the following borrowings were carried out in 2009: the April eurobond followed by the first domestic auction of bonds denominated in euros in September.
In October 2009 the Ministry issued bonds denominated in Swiss francs. We are also planning to issue Czech crown bonds for retail investors next year.Bulgaria: Due to the limited requirements for finance of the state budget, borrowings were denominated in the main foreign currencies. For 2010 we plan to continue with the current conservative policy in terms of currency differentiation. In respect to the introduction of new structures we are assessing and analysing several options.Suszynska, Poland: We have an active investor relations programme and we try to communicate our credit story to our exising debtholders and to new investors as well. This year for the first time we organised a roadshow in Middle East and also accessed a new market segment by issuing euro-denominated securities in form of registered bonds under German law. Pleec, Slovenia: In 2010 we will continue to focus on benchmark bonds. But we will consider alternative financing that could represent important sources of liquidity in times of market difficulty.Buzas, Hungary: As a part of the financing strategy, AKK has always been eager to diversify the investor base both geographically and institutionally. Apart from the regular eurobond issuance in the last five years we issued bonds denominated in Swiss francs, US dollars and Japanese yen. This strategy is still in place, so we shall evaluate the different funding opportunities taking into consideration the diversification as well.Krajcír, Slovakia:One of the priorities of debt management in Slovakia is to create and maintain a diverse investor base. According to this strategy Eurobonds are expected to be issued every consecutive year and we will consider other sources to aid diversification.
EUROWEEK: In a period of loose monetary policy, rising inflation is a key concern for bond investors. Have you considered an inflation-linked bond? If not, why not? Pleec, Slovenia: We do not expect to use inflation-linked bonds as we prefer to focus on our benchmark bonds.Staykov, Bulgaria:At present there is no intention for issuance of inflation-linked bonds. This is in line with our domestic commitment to pursue a prudent policy in respect to public sector wages, so that they will not stimulate private sector wage increases and will not increase at rates that can deteriorate the competitiveness of the Bulgarian economy and push up the inflation rate. Moreover, monetary policy in Bulgaria is not loose due to the currency board arrangement.
However, one must remain conscious and flexible enough in order to react fast against any possible risk, and we will consider possibilities for future issuance.Zelionis, Lithuania: Lithuanias bonds are medium-term only, therefore, inflation-linked bonds have not been considered. Krajcír, Slovakia: The Slovak Republic is considering the idea of inflation-linked bonds just like it is considering any other prospective instrument although there have been no concrete steps undertaken for an issue of this kind.Leatka, Czech Republic:While monetary policy is noticeably loose in major countries such as US or UK and to a certain extent also in the eurozone, the Czech National Bank did not need to adopt such measures including quantitative easing. The CNB certainly will not hesitate to adopt adequate measures to keep inflation under control once the economy starts growing again. Consequently the Ministry does not intend to issue inflation-linked bonds for the timebeing. Suszynska, Poland: We used to offer inflation-linked bonds denominated in Polish zloty and linked to Polish CPI. This instrument was quite popular with foreign investors, but since the crisis started investors have not been especially keen on this structure. We even bought back some of it upon requests from investors. We might reopen this segment next year.Buzas, Hungary:AKK has just introduced a new retail instrument indexed to inflation. However, inflation in Hungary is still gradually decreasing, so institutional demand for a linker is very limited.Ligi, Estonia: We are not considering any kind of bonds. Estonia is experiencing deflation I am not sure anyone would be interested in deflation-linked bonds.
EUROWEEK: What do the bankers think?Ross, HSBC: Inflation has clearly started to become a more important issue. In the future, we expect that many more will take it into account in their investment strategies. We believe that this product is becoming more relevant for issuers and we will continue to see investors demand for CEE issuers in the future.Giesen, RBS:There will certainly be an increased market for linkers, as we cross the current rate cycle towards an inflationary world, but we believe investors will look toward core sovereigns to express their inflation views as a first step before they look at combining an inflation view with a credit spread view in a CEE sovereign linker.
We note that a select number of CEE sovereign issuers are looking into longer dated issues, such as Slovenias recent 15 year transaction, and we are likely to see even longer-dated deals under consideration. However, we do not anticipate inflation-linked bonds to be a frequently used approach for the CEE sovereigns.Tuffey, Credit Suisse: Investor appetite for inflation-linked assets is growing within the region. It is clear that it is only a matter of time before we see more issuance from sovereigns in the inflation product in CEEMEA.
EUROWEEK: Are you worried by the large amount of supply due to be raised by the Western European, Australian and US sovereigns will you be competing for supply?Staykov, Bulgaria: As mentioned above, sovereign bond issuance plans are still subject to analysis and will depend on the market conditions. However the potential bond volume is negligible compared to the amount issued from the mentioned sovereigns. The sustained economic and political stability in the country, along with the fact that Bulgaria hasnt been in the sovereign markets since 2002, support the high investor demand for Bulgarian bonds.
We do not expect to compete with the likes of Germany and France or US for liquidity as the investor base these countries rely on is different from the one that we would potentially target, although it is true that during the consolidation amongst the investor base during the crisis this differential has narrowed.Ligi, Estonia: Yes, we are very worried about the rising debt levels and long-term sustainability of public finances in other countries.Buzas, Hungary:Our peer group does not consist of the above-mentioned countries. The major task is to make us visible and to be distinguished from the rest of the group.Brown, Barclays: Demand will be there. Success breeds success and strategic inflows into the investor base continues apace. The shift from EU convergence, German dominated investors to a global emerging market investor base has been stunning. That was helped, of course, by the repricing of the asset class to more normal spreads for the rating and credit profile. Suszynska, Poland: According to market research there may be some fierce supply competition in the euro and dollar markets. However, our requirements in those markets in terms of size is relatively small. And I believe we will be able to attract investors willing to diversify and appreciate the value of our credit (given a very positive fundamental economic situation in Poland the only growing economy in the European Union this year). This years experiences give us confidence we are much more confident about going into 2010 than we were going into 2009.Giesen, RBS:We expect CEE sovereign issuance to remain a small fraction of total EU sovereign issuance in 2010, even as government guaranteed bank financing in eurozone countries is anticipated to decrease substantially. As such, within the context of global liquidity considerations and unless individual country-specific credit concerns become an issue, we do not see material risks to demand comfortably meeting this supply
Furthermore, countries like Poland have demonstrated that regional sovereigns are very capable of accessing the different investor bases available, from euros, through to US dollars, Swiss francs and Japanese yen, to increase the liquidity available for their funding programmes. However, the CEE sovereign space has become more differentiated, with the eurozone countries such as Slovenia and Slovakia (which joined the euro in January 2009) trading at much tighter spreads and having better access to the European government bond investor base than some of the other non-eurozone CEE countries.
For these non-eurozone sovereigns, we have seen a more noticeable shift in the investor base, as emerging market funds and bank treasury desks have taken up some of the slack from the usual government bond investors.
We also note that retail/private banking demand has become a significant funding source as retail investors have moved into fixed income markets in strength. As 2009 progressed, and spreads continued to contract, retail investors like many others, moved into higher yielding names.Leatka, Czech Republic:Despite the huge supply of sovereign debt the demand for our debt instruments has been so far much higher than our funding needs. Zelionis, Lithuania: Sovereign funding needs are rising all over the world and Lithuania will not be able to compete with western European sovereigns. However, Lithuania, being an EU member, can offer to the investor security at a comparatively attractive yield. We have an established investor base, we keep attracting new investors and we should be able to further develop our niche in the market.Tuffey, Credit Suisse: The demand will be there, the question is at what price. There is still substantial demand for credit products in the market but investors will be selective on the names.Krajcír, Slovakia:Slovakias funding needs are, on a global scale, rather low, in line with its status as a small economy. Pleec, Slovenia:We are not worried as far as we can see, the supply coming from western European and other countries next year is similar to what we saw this year. The reasoning behind this is that the Republic of Slovenia has a stable AA rating which is appreciated by investors.Ross, HSBC:Having lead managed sovereign deals and some corporate deals from Poland, Slovakia, Slovenia, and Lithuania, and corporate deals in the Czech Republic we have witnessed some of the largest oversubscribed books in years which clearly illustrates the confidence investors have in the regions issuer base. This clearly demonstrates an excess of demand for these products in the CEE region rather than across Europe.
EUROWEEK: Are credit ratings more or less important today than they were before the crisis?Tuffey, Credit Suisse: Credit ratings remain key to investors. Many investors are limited in what assets they can buy by internal rules that specify the credit ratings of their assets. Once the ratings "hurdle" is passed then investors refer less to credit ratings when making relative value investment decisions and other metrics become more relevant such as strength of local market, size of funding requirement, stability of government etc.Pleec, Slovenia: We think that credit ratings have been an important indicator for the investor and will continue to be an important indicator.
We even think that credit ratings will become more important.
On the other hand we think that the CDS curve as an indicator of credit risk of an issuer in the case of the Republic of Slovenia is not the adequate indicator due to the fact that the Republic of Slovenias CDS curve is very illiquid.
We dont expect in the short term any change in our rating as long the government continues to follow its policy of lowering the deficit in the near future.Ross, HSBC: Credit ratings have always been an important tool used for investment decisions. However, as many investors have seen significant changes in ratings globally, it has become much more important to do your own due diligence on investment decisions across all credit classes.Krajcír, Slovakia: Criticism has been recently raised that rating agencies contributed to the financial turmoil. It is hard to say if there is a better way to assess credit risk.
The Slovak Republic has the best rating among V4 countries and we are of the opinion that the sovereign rating, in general, is only an impartial view of the current situation.Giesen, RBS: In our view, credit ratings have become less important in the CEE sovereign space. While they remain a critical component of investors analysis, ratings almost always lag the market perception of risk, and investors are now much more focused on their own perception and valuation of credit fundamentals.
Within the context of CEE sovereigns, we believe investors will therefore remain very focused on economic fundamentals, such as budget deficit, short-term refinancing risk and currency vulnerability.Suszynska, Poland:Credit ratings still seem to be quite important, especially for investors who cannot spend enough time and/or resources on their own internal credit analysis of each individual country. And reports prepared by major rating agencies are widely read and discussed. Regarding any potential rating changes, we do not expect and do not see any reasons for downgrades.
When it comes to upgrades the answer would be probably the same, because since the beginning of the crisis rating agencies seem to be very cautious and reluctant to upgrade anybody.Brown, Barclays:Theyre less important, as investors do their own credit work and the agencies lost some credibility with some of the EU accession ratings in the past. Credit metrics, stability of political process and health of the economy are more important.Ligi, Estonia:Estonia has one of the best financial disciplines in the whole of the EU. We expect that euro area accession will improve our rating.Leatka, Czech Republic:The credit ratings are as important as they were before the crisis. There are no indications about possible changes of our sovereign ratings.Buzas, Hungary: Credit ratings continue to be an important part of investment decisions despite the fact that rating agencies sometimes seem to be unable to forecast significant changes in the market or are slow in responding to market events.
In the case of Hungary, we believe, rating agencies overreacted, so with the positive changes in the economy we expect more positive rating news in the future.Zelionis, Lithuania:We have already witnessed the impact of downgrades. The credibility of credit ratings is widely questioned, but they remain important. Our experience shows that investors, lacking resources for detailed research on smaller borrowers like Lithuania, base their investment decisions on the rating level, and to some extent headlines in the press. We put our efforts to keep investors and rating agencies informed about Lithuanias development. Staykov, Bulgaria: Credit ratings will maintain the significance as an unbiased judgment and a benchmark for potential investors, on condition that credit rating agencies guarantee a realistic and objective estimate of issuers creditworthiness.
EUROWEEK: What is the biggest challenge your department will face in 2010? Pleec, Slovenia: It will be to execute the Programme of Financing for the year 2010 as efficiently as possible. The Treasury will try to lower the debt servicing in the year 2010 and the year after with some debt management transactions.Buzas, Hungary:The major objective for the years 2009-2010 is to restore confidence in the Hungarian domestic government bond market, so we shall continue our efforts in this direction. With increasing demand coming from domestic institutional investors (pension and insurance funds, asset managers), as well as banks, we can rely more on market financing, and treat the international loan package as a back-up facility only.Brown, Barclays:There are several challenges. One is the crowding out of high grade sovereigns and the return of higher yielding sovereigns such as Russia and Argentina. Another is the strategic shift from investors out of credit, into other sectors such as equities, real estate, private equity, etc. Then there is the lack of recovery in the global economy and the risk of volatility when central banks start to drain liquidity from the system and withdraw some of the support mechanisms that have been with us for the last 18-24 months.Giesen, RBS:The biggest challenge for investors will be timing the correction which will come when policy makers finally reverse their current liquidity-supporting activities.
Meanwhile, we expect a continuation of credit differentiation within CEE, with sovereigns such as Czech Republic, Poland, Slovakia and obviously Slovenia being able to satisfy the bulk of their funding needs in the euro market, while other regional sovereigns will look at a more diversified funding programme. The challenge will be for investors to accurately identify and value each issuer in this spectrum, and it will be more important than ever for issuers to position their credit story with investors as strongly as possible.Ligi, Estonia:The biggest challenge for Estonia is to guarantee meeting all the Maastricht criteria and joining the eurozone in 2011. Meeting all the criteria would be a great accomplishment, as very few of the EU and eurozone countries meet the criteria at the moment.Staykov, Bulgaria:The biggest challenge of the government in 2010 remains reaching a balanced budget target, while addressing the foreseen economic and structural reforms. In the context of the debt management area the challenge is related to minimising debt refinancing cost, while hedging the financial risks and taking into account the development of the domestic capital market in the context of the financial system as a whole.Zelionis, Lithuania: The whole of 2010 will be a challenge for Lithuania and for the Treasury. The fiscal deficit continues to be significant, and economic recovery is forecast to materialise in 2011, so there will be plenty of challenges. On the other hand, those challenges will help us look into new opportunities, solutions, and partners.Leatka, Czech Republic: To arrange for flexible and sustainable funding of the budget needs at justifiable and acceptable costs.Suszynska, Poland: The biggest challenge will be to find the optimal trade-off between funding costs and risk associated, given the fact that we are operating in a new environment in terms of general market situation and the amount of funding to be raised. Finding the right balance between domestic and international funding and optimal structure of instruments offered (especially in regard to maturities) will be probably the main challenges we are facing.
However, we believe that our close relationships with market participants and reliable feedback will allow us to successfully complete our borrowing programme fulfilling at the same time goals of our debt management strategy.Ross, HSBC: As in 2009, the biggest risk will be the increased supply coming to market. The timing of an issuance calendar will be key. The second challenge will be investors who are nervous of a setback in the economic recovery, or alternatively, inflation spikes pushing the yield curve upwards. However, we do believe that 2010 will be a continuation/enhancement of 2009.Tuffey, Credit Suisse: Uncertainty breeds volatility. Market volatility will pick up when global rates start to rise, but as there is no clear consensus from economists on economic growth or inflation outlook in the region, the timing and extent of the rate rises is so uncertain.