On the morning of June 3, 1992, few would have been brave, or foolhardy, enough to have predicted that within 15 years the single European currency would have created the largest fixed income capital market in the world. By June 2007, according to figures published by the International Capital Market Association, the euro capital market was worth $5.3tr equivalent, versus $4tr for the dollar market.
The previous day, Denmark had unexpectedly delivered a blow to monetary union that many economists feared might be terminal. In the Danish referendum on monetary union, the no movement polled 50.7% of the votes, prompting traders to dump their Gilts, OATs and Ecu bonds, and foreign exchange dealers to mark their francs, lire and pounds sharply lower. As the anti-euro June Movement celebrated in Copenhagen, investors scurried towards the perceived safe haven of Deutschmarks, while economists and the financial media started to write obituaries for monetary union.
France would save the day with the petit oui it delivered in their referendum on monetary union three months later but not before the yield on the Paribas 10 year Ecu index had almost reached 10%, compared with 8.5% earlier in the year. French 10 year OATs, meanwhile, which had been trading at 58bp over Bunds on the eve of the Danish referendum, were quoted at well over 100bp by the time of the French referendum in September.
In the long term, that razor-thin French vote would be a pivotal event in reviving the euros fortunes. But it was not until the European Council summit in Madrid in December 1995 that the European capital market acknowledged that monetary union was very much back on the agenda. That much was clear from the anaemic issuance volumes in the Ecu sector after the Danish no vote.
"At the height of the Ecu market, before the Danish referendum, there were 42 official market makers in the sector, more than in any other European currency," says Sean Park, one time head of European syndicate at BNP Paribas in London who joined Paribas in 1993, moving to debt syndicate in 1996. "After the Danish no vote, at the nadir of the market, that plummeted to six or seven." The figures told the story clearly enough, with issuance nose-diving from more than $21bn equivalent in 1992 (most of which was raised in the first half of the year) to a little over $7bn in 1993.
Italy, France carry the euro flag
For many borrowers, that was an alarming slide, because by then the Ecu and the euros other predecessors had already helped to internationalise the ownership of their debt. Domenico Nardelli, now managing director and head of EMTNs at Bank of America in London, joined the Italian Treasury in 1994 where he became head of international funding and liability management. He says that for a nation with debt levels and borrowing requirements as high as Italys, the implications of the launch of the euro were "revolutionary".
But he adds that long before the arrival of the single currency, Italy was an important beneficiary of initiatives aimed at laying the groundwork for monetary union. "Its no secret that Italy was one of the earliest and most enthusiastic backers of the single currency," he says. "Policymakers were very quick to see the positive implications of finding ways of eliminating the currency concerns that had weakened international confidence in the republics financial markets. In the early 1980s, Italy started to issue instruments called CTEs and BTEs that were denominated synthetically in Ecus and were the first attempt by the Treasury to attract an international investor base by eliminating foreign exchange risk. Given Italys history of inflation and currency devaluations, it was inevitable that international investors would be lukewarm about taking exposure to Italian debt denominated in lire."
By December 1990, about 4.5% of Italys total government debt was accounted for by CTEs and BTEs.
While Italy is seen as one of the sovereigns that consistently supported the creation of a euro denominated debt market, Park says that he would put the French Treasury at the top of the list of borrowers responsible for ensuring the eventual success of the market. Although sovereigns like Finland and Portugal continued heroically waving the flag for the Ecu in the dire days of 1993 and 1994, it was Frances dogged commitment to the euro adventure throughout the 1990s and before that created a benchmark for others to work with.
"Between the start of the Ecu market in the early 1980s and the launch of the euro in 1999, the one constant was the French Ecu treasury curve," says Park. "It was Frances commitment to the Ecu market that allowed other issuers to bootstrap off its curve."
Beyond its benchmark issuance programme in Ecus, the French government took several other important initiatives in the 1990s aimed at strengthening the pre-market for a single European currency as well as its own credentials as the provider of the benchmark curve for a euro market. Those ranged from the launch of the Ecu bond futures market on Frances future exchange, the Matif, in October 1990 through to the issuance in August 1998 of the first inflation-linked government bond in the euro zone.
EIB establishes de facto standard
If France had compelling political motives for championing monetary union in the 1980s and 1990s, then so too did the European Investment Bank. It too had consistently been in the vanguard of innovation in the euro market since 1973, when it launched the first ever bond denominated in European Composite Units (Eurco), which was a Eurco30m 15 year transaction led by N M Rothschild.
More than two decades later, the EIBs Ecu500m five year transaction launched in March 1996 was also regarded as a critical building block for the market because it was the first of its kind to guarantee a one-for-one conversion from Ecus to euros.
This transaction also heralded the arrival of so-called "Euro-Tributary" transactions, or those that were denominated in legacy currencies but documented to allow for their conversion into the new European currency after January 1999. The EIBs programme began in 1997, with the launch of a Dfl1bn 10 year transaction via ABN Amro. The borrower explained that "the bank intends to consolidate [its] Euro-tributaries with other euro/Ecu issues to create, for each maturity category, larger single euro issues after January 1999. With these benchmarks, the EIB will be creating tributaries for a major euro river."
For the EIB, however, the landmark transaction of 1997 was its first Eu1bn issue. This was a seven year deal priced at 2bp over OATs and led by CDC Marchés, Paribas and SBC Warburg, which generated demand that was strong enough to warrant an increase of Eu300m three weeks after launch. "The EIBs 2004 deal in 1997 was a watershed for the euro denominated market," says Park. "It simply blew out of the door because every bank, every trader, and every investor in Europe wanted to be involved in a deal that effectively established the de facto standard for executing euro denominated transactions."
Although that standard had become routine by 1999, in early 1997 taking one step beyond the Euro-Tributary format to issuing directly in euros represented a substantial leap for Europes bond market.
"Issuing Tributary bonds denominated in French francs or Deutschemarks was fine because there was very clear documentation indicating that bondholders would be paid back at a certain level in euros when monetary union took place," Park explains. "But in the case of the euro deal, we were issuing in a currency that did not exist, so we undertook that investors would be repaid in Ecus until such time as the single currency was launched."
That inevitably led to some animated discussion as to the legitimacy of calling the transaction a euro denominated issue at all. But the EIBs then president and chairman, Sir Brian Unwin, was in no doubt about the deals validity, or about its significance for the EIB and the statement it made about monetary union. Saying that the transaction inaugurated a "new phase" in the EIBs support for the euro, he announced "it reinforces our role as the European Unions financing arm, and forms part of our long term strategy to support Europes monetary union and economic integration."
Parallel bonds appeal
While the EIB had been readying its groundbreaking Euro-Tributary issues, other prestigious borrowers were playing their role in preparing for monetary union by issuing in so-called "parallel" form.
Three weeks before the EIBs euro icebreaker in 1999, for instance, Austria had issued a Ffr5bn seven year transaction via JP Morgan and CDC Marchés dubbed a parallel bond, which gave bondholders the right to convert their holdings into an existing issue denominated in Austrian schillings that was also earmarked for redenomination into euros.
As a mechanism for injecting added liquidity into their issuance and for ensuring that their legacy currency bonds would not be orphaned after the launch of the euro, parallel bonds caught on quickly, with L-Bank and then Siemens quickly following Austria to market. The Siemens transaction was especially eye-catching, given how barren a market Germany had traditionally been for corporate issuance. Again led by JP Morgan where Paul Hearn and Jo Cook had been accredited for inventing the parallel format the Siemens 10 year deal was carved into three tranches of DM750m, Dfl500m and Ffr2.5bn.
Another variation on the parallel theme was the so-called catamaran structure devised by CCF and Morgan Stanley allowing for money market products to use convergence features. The first of these transactions, also unveiled in 1997, was a floating rate note for CCCIF split into Ecu500m and Ffr3bn, exchangeable into the new European currency after January 1 1999.