The issuers facing arguably the toughest challenges in euroland are EU sovereigns. Aside from the benchmark issuers, Germany and France, state treasury officials have suddenly found themselves as a part of Europe's credit markets.
Gone are the days when they could issue to a loyal domestic investor base. Now they have to compete for funds by providing the product that investors want across euroland and beyond.
Philip Moore spoke to some of the major EU sovereign funding officials to find out how their approach to borrowing in euroland has changed.
For an observation about the speed with which primary government bond markets in euroland are transforming themselves, head north.
Helsinki is about as far north as you can get within the Emu block, and at the State Treasury of Finland, director of finance Satu Huber says that she has been surprised by the pace of change within the market. "In 20 years of being a banker I never saw people change their minds as often as they have in the last eight months," she says.
It is not difficult to see why these changes have come about. At the other geographical extremity of euroland, in Lisbon, Vitor Bento, chairman of Portugal's Public Debt Office, says that in one sense the launch of the euro has made his life easier, because it has helped to bring spread differentials for southern European borrowers down so dramatically.
But he also echoes a number of other smaller sovereign issuers in euroland when he says that "we used to be kings in our own fairly small market; now we are pawns in a much bigger market."
Superficially at least, virtually all of euroland's sovereign borrowers beyond the benchmark issuers of Germany and France already seem to have done an admirable job in repositioning themselves as credits in the context of an integrated Europe.
A number have done so by expanding their yield curves, improving the structures of domestic auctions, adding to their base of primary dealers and, in some instances, opting for a syndicated primary market approach as a means of supplementing the traditional auction method.
In many cases, the response to Europe's changing realities has been distinctly proactive, rather than lethargically retroactive. Christine Holm, director of the Swedish National Debt Office, for example, insists that the internationalisation of Sweden's domestic government bond market has been continuously evolving since the early 1990s, with the launch relatively early of products such as index-linked bonds and parallel euro-domestic issues.
More recently, she says, that process has been extended further still - with the introduction of a stripping facility, for instance, together with the expansion of the panel of authorised dealers to include two additional overseas representatives in the form of JP Morgan and Salomon Smith Barney.
Holm also points out that, in contrast to a number of other European sovereign issuers, Sweden has always been viewed as an international credit. "Traditionally between 20% and 25% of our domestic government debt has been held by overseas investors," she says, "and the foreign currency debt issuance of the Kingdom of Sweden has always attracted a very strong international following."
Other European sovereign borrowers also say that they have seen a substantial shift towards foreign ownership of their domestic product in recent years.
For example, Helmut Eder, managing director of the Austrian Federal Financing Agency, insists that Austria was what he describes as a "euro-optimist" by the late 1980s, and that it started to internationalise its domestic auction system in 1990 as a result.
"To give you a figure," he adds, "by December 1997 between 40% and 90% of every auction we held was taken up by the international primary dealers, and in the case of a 30 year auction earlier this year 92% was placed internationally."
In Brussels, Louis de Montpellier, director of strategy and risk management at the Belgian treasury's Debt Agency, makes a similar point. For Belgium, the need to diversify its investor base was especially pressing, given that in 1998 (the latest year for which reliable statistics are available), around 90% of Belgian debt was held either by domestic or Luxembourg-based investors.
"It was pretty obvious to us a number of years ago that we were going to have to adapt our borrowing strategy in accordance with our diagnosis about the impact of the euro," says de Montpellier.
"We knew that the launch of the euro would present us with a challenge over the short to medium term because it would lead the domestic investor to diversify internationally, and so we would have to offset the outgoing flows with incoming flows. If not, our spreads would widen. But we also recognised that if we responded sooner rather than later we could turn this development to our advantage by more than offsetting these flows."
The strategy, says de Montpellier, therefore focused on internationalising the public debt investor base and therefore adapting the domestic auction system to this new audience well in advance of the euro's launch.
This included expanding the size of the primary dealer base to 18 by allowing dealers to be located anywhere within the EU rather than exclusively in Belgium. It also meant adding on five so-called "recognised dealers" which are not tied to minimum market shares in the primary and secondary markets, three of which - HSBC, Nomura and Bank of Tokyo-Mitsubishi - are focused on Asia.
A more recent development among smaller European sovereign borrowers has been the superimposition onto their domestic government bond issuance programmes of Euromarket mechanisms such as pre-marketing, bookbuilding and syndication.
In April 1998, for example, Sweden launched an Eu2bn domestic government bond issue via JP Morgan, Paribas and Warburg Dillon Read priced at 11bp over OATs.
The following month, Finland adopted a similar approach when it launched its first syndicated Eu2bn transaction structured as a domestic government bond via JP Morgan and Paribas, priced at 8bp over.
According to Huber, this deal heralded a new era of liquidity in the Finnish government bond market. "It may not look like a big deal by today's standards," she says, "but at the time it was a very sizeable issue, and since then its size has been increased through regular auctions."
She adds: "Our May issue was aimed at creating liquidity via the syndication process and adding further liquidity later through the auction mechanism. The other purpose of the May deal was to tell investors that the economy was in good shape, to widen the investor base and to impress upon Eurobond investors that buying a domestic government bond was as easy as buying a Eurobond."
Huber explains that, as a relatively small borrower in the context of euroland, it was important for Finland to establish its benchmark well in advance of formal European Monetary Union. "At the time we wanted to issue before the shelves were full and take advantage of supply being smaller than demand," she says.
Since last summer, other borrowers have embraced the syndication mechanism with enthusiasm. In January, for example, Portugal took an immense stride towards the internationalisation of its domestic market when it launched an Eu1.5bn obrigacao do Tesouro via ABN Amro, BNP and Caixa Geral de Depositos, priced at 25bp over 2009 Bund, which represented a level equivalent to 2.5bp through Spain.
In response to strong demand from Asian accounts to exposure to the new European currency, an important element of this deal was the addition by Portugal of Nomura (and later of Daiwa) to its panel of primary dealers for the transaction, the size of which has since been increased by a series of monthly auctions.
"The aim of the deal was to spread our paper among different investors, to increase the visibility of the name and to exercise more control over the pricing," says Bento.
"We also wanted to start out with a sizeable amount. Although Eu1.5bn may look small in the broader context of the euro, it is 10 times the average size of a domestic auction. It has been a very considerable success because up to two thirds has been placed among investors outside Portugal," he adds.
Also in January, and with broadly the same objectives as Portugal, Belgium launched a record-breaking Eu5bn OLO via ABN Amro, Generale and WDR priced at 26bp over Bunds, or 17bp over OATs.
"It was absolutely clear that we could never have raised as much as Eu5bn through a single auction," says de Montpellier. "The average size of an auction is about Eu1.3bn, and although you can increase the size of auctions you can seldom do so without damaging the spread."
De Montpellier says that he was delighted with the market's response to the Eu5bn offering. "In the few days after launch it tightened by a couple of basis points, and it stabilised at the same level for the next few months. It is a little wider now but that has nothing to do with anything relating specifically to the Belgian credit. I would say we achieved a very satisfactory pricing pattern as a direct result of the syndication process."
This was in part because of the very broad distribution of the issue, which according to de Montpellier saw 32% of the deal placed in Belgium and Luxembourg, 37% in the rest of euroland, 16% in Switzerland, 5% in the UK, 5% in non-Japan Asia and 2% in Japan.
"In total we reached more than 400 institutional accounts in Europe and elsewhere," says de Montpellier, "many of whom were new to Belgian debt."
Syndicate officials at the lead managers of the Belgium deal agree that the Belgian OLO met all of its objectives. "Belgium did not need to do much refinancing but it faced the problem of more than 90% of its debt being held by local investors," says one banker.
"Clearly the Eu5bn deal was hugely successful. Its size was massive and very broadly placed. For example, we did not sell a single bond to Belgium. Then again, Belgium paid probably a couple of basis points on the re-offer spread more than it would have done in an auction and fees on top of that."
Belgium followed its January OLO with the launch in April of an Eu2bn floating rate OLO via Deutsche and Barclays Capital, with a three year deal at Euribor minus 10bp aimed again aimed at diversifying debt and reaching new accounts.
Although bankers say that this has been a highly illiquid offering - "we've traded it once," says one - de Montpellier disputes this. "We've seen consistently very tight bid/ask spreads on the issue," he says, "and the fact is that an FRN will inevitably be targeted at specific institutions such as central banks and money market funds."
Among other non-benchmark issuers in Europe, Austria has also been busy expanding its yield curve and further diversifying its investor base via a blend of traditional auctions and syndicated offerings.
Highlights this year have included a 10 year Eu1.1bn issue via Deutsche, Nomura and WDR priced at 10bp over Bunds, and a punchy Eu1.1bn 2004 Bundesanleihe priced at flat to Bunds via Dresdner Kleinwort Benson.
The sovereigns appear to have made a good start to meeting the challenges of euroland, although some bankers say that some smaller issuers remain longer on rhetoric than on action - and that while they may deserve high marks for what they have done at the primary market level, they still have much to learn when it comes to looking after the secondary market.
"Many of the smaller sovereigns have made a tremendous noise about the progress they've made," says one banker, "but they have not promoted themselves through roadshows and they have not really changed the role which is played by domestic banks in the way they fund themselves."
The borrowers themselves insist that this sort of criticism is misplaced. On the subject of roadshows, de Montpellier at the Belgian treasury says that he has just returned from a two week visit to Asia aimed as much at discovering more about Asian investors' attitudes towards the euro as at promoting Belgium's debt.
But borrowers also insist that there is palpable evidence that their changing strategies have achieved the dual aim of broadening the investor base and reducing their borrowing costs. At the Austrian treasury, for instance, Eder says that the liquidity spread between Austria and Germany now ranges from between 5bp to 20bp depending on the maturity.
"In the 10 year maturity we now trade at 18bp over Germany," he says, "compared to Holland and France which trade at about 15bp or 16bp over. I think that a spread differential of 2bp or 3bp compared to Holland and France is very reasonable for a borrower the size of Austria."
Smaller sovereign issuers in Europe also emphasise that, in spite of the success of syndicated deals, there is no question of turning their backs altogether on the conventional domestic auction mechanism.
"If the question is, will we only do syndicated deals in the future the answer is clearly no," says de Montpellier. "We will use the syndication method when we think it can genuinely help the primary dealers to distribute the paper more efficiently. But the fact is that the savings ratio in Belgium remains high and the repo system works well. So we don't expect to see the domestic investor abandoning Belgian debt in packs."
In Vienna, Eder also says that the auction system will continue to be the main plank of Austria's borrowing strategy. "The auction system is still a highly efficient way of raising funds," he says. "For example, we are one of the European sovereigns which has the ability to cancel auctions if we feel unhappy about the bids. Of course we don't like to do this, and we have only done so twice, but it gives us added efficiency in volatile markets."
Syndicated deals, says Eder, will continue to have an important role to play under specific circumstances. "From time to time we may do block trades through syndication," he says. As an example, he points to an underwritten Eu220m 2014 deal launched by Austria earlier this year in response to reverse enquiry demand from Asia.