OECD Sovereign Borrowing Outlook 2019

Chapter 3. Public debt management under stressed market conditions: A review of the recent experiences of Greece, Iceland, Ireland and Portugal

Abstract

The aim of this chapter is to identify challenges in financing government budget deficits under stressed market conditions; immediate reactions to these challenges; as well as the medium and long-term policy responses for facilitating and maintaining market access. As increased debt services going forward can leave some economies vulnerable to rollover risk, sudden deterioration in market sentiment and tightening of credit, it is timely to look back and highlight key lessons learned from the recent country experiences with stressed market conditions.

With this in mind, this chapter presents the recent experiences of sovereign debt management offices of Greece, Iceland, Ireland and Portugal that were at the epicentre of the multi-year European sovereign debt crisis. These country experiences provide insights into the challenges with deteriorated financing conditions and loss of market access as well as the effective means of addressing the challenges and re-establishing market access. Practices of these countries highlight the relevance of being a transparent and predictable issuer, building contingency funding tools for flexibility, a solid relationship with the investor base, as well as a two-way communication with wider market participants.

3.1. Introduction

Public debt managers always face some level of uncertainty stemming from changes in funding needs, as well as in the funding environment. Public debt management generally becomes more difficult than usual under stressed market conditions. Country experiences suggest that deteriorated fiscal balances can trigger sudden shifts in sentiment and perceptions of sovereign risk, which in turn lead to interruption of market-based borrowing.

This chapter sheds a light on debt management practices under stressed market conditions based on the recent experiences of four countries: Greece, Iceland, Ireland and Portugal.1 The aim is not to investigate the causes or macroeconomic consequences of the European debt crisis, but rather to explore the challenges faced by debt management offices when market access is deteriorated or lost, as well as appropriate policy responses to these challenging situations.

Key findings

• The immediate impact of stressed market conditions is often felt on cost and maturity of government funding, in terms of higher interest rates and shortened borrowing maturities. If conditions deteriorate further (e.g. with a sharp increase in government financing requirements due to re-capitalisation of the banking sector), this may even cause a partial or total loss of market access. This was the case in Greece, Iceland, Ireland and Portugal during the European debt crisis of 2010-2012.

• The size and extent of the financial crisis led to a deep loss of confidence for the reviewed countries and a shift in the investor base. While more traditional “buy-and-hold” investors, such as pension funds and insurance companies, left the government bond markets of these countries, newcomers, like hedge funds, took a more active role.

• Debt managers of all four countries, receiving financial support through IMF/EU programmes, made use of liability management exercises (e.g. buy-back and switch operations) to smooth redemption profiles, and extend average life of debt, thereby mitigating refinancing risk. This also facilitated regaining investors’ confidence.

• Regaining and maintaining market access requires a concentrated focus on investor engagement. Experiences suggest that having an investor relations programme was an effective tool for developing long-term relationships with investors, broadening the investor base, and providing transparency about the macroeconomic situation and funding plans.

• Against stressful episodes in sovereign debt markets, it is important to increase flexibility via liquidity buffers and credit lines in funding operations without damaging predictability. Greece, Iceland and Portugal benefited from building up liquidity buffers against liquidity risks. Issuance techniques and pricing systems can also be adapted to market conditions. For example, Ireland and Portugal switched to a single-price auction, mainly to make pricing easier and the auctions more accessible to a wider range of market participants.

3.2. Dealing with public debt management under stressed market conditions

Public debt managers typically face some level of uncertainty stemming from changes in funding needs, as well as in the funding environment. Government funding requirement, which is submitted to debt management offices, is subject to changes during a fiscal year partly due to deviations between forecast and actual budget expenditures and revenues. In the OECD area, governments funding needs are predominantly financed through financial markets. Therefore, a deterioration in market sentiment due to various factors including political events, macroeconomic developments, and monetary policy decisions, has a strong impact on public debt management. Public debt managers, striving to be predictable, regular and transparent issuers in the market, consider a “typical” level of uncertainty (i.e. level of uncertainty observed in normal times), when they develop funding programmes.

When undesirable changes occur in funding needs and funding conditions at the same time, this might dampen investors’ appetite significantly, which in turn poses a danger for government financing depending on the size and duration of the volatility. That said, the borrowing environment for governments could become more difficult than usual due to increasing funding pressures coinciding with sudden shifts in sentiment and perceptions of sovereign risk. The 2013 edition of the Sovereign Borrowing Outlook discussed how occasional destabilising dynamics of government securities markets creates huge policy problems including loss of market access.2 During the debt crisis in 2010-2012, significant sales of sovereign debt by foreign and domestic investors together with soaring borrowing needs, resulted in a surge in interest rates demanded by bond investors to very high levels in several countries. The borrowing environment for governments became difficult due to the complications generated by sudden shifts in sentiment and perceptions of risk associated with certain sovereigns: the so-called swings in the “risk-on” and “risk-off” trades. It is highlighted that these sharp and significant price deviations relative to fundamentals led to interruptions in government’s market access and even loss of market access in some cases. The empirical literature has explored the issue of a self-fulfilling prophecy on various occasions in terms of the potential implications of debt dynamics on market access conditions (see, among others, Reinhart et al. 2003; Kraay and Nehru 2006; Manasse and Roubini 2009; Ghosh et al. 2012; and Bassanetti Antonio, et al. 2016).

Looking back, the global financial crisis, and the policy response to it, implied drastically increased additional borrowing requirements across the OECD area. As discussed in previous editions of this publication, the legacy of the financial crisis continues to cast a long shadow over public finances, in the form of high debt burdens and heavy debt repayments. Gross borrowings of OECD governments from the markets, which peaked at USD 10.9 trillion in 2010 in the wake of the financial crisis, are set to reach a new record level in 2019, when they are expected to exceed USD 11 trillion. As a result, central government debt-to-GDP ratios in OECD countries remain above 70% (and close to 90% in G7 countries), which is high by historical standards. In terms of refinancing of existing debt, sovereigns in the OECD area need to roll over 40% of their outstanding marketable debt in the next three years.

While crisis-related legacies remain in some countries, monetary policy transition in major markets, escalating trade tensions, and heightened geopolitical risks might pose challenges going forward for financial markets. Indeed, the recent bouts of volatility in financial markets, in conjunction with slower and less balanced economic growth expectations in the OECD area have raised market concerns over sovereigns’ ability to repay their debt and put extra pressure on sovereign funding conditions in some countries. It is, therefore, timely to look back and assess the challenges faced during the European sovereign debt crisis, and to highlight key lessons learned from the experiences with stressed market conditions.

Country experiences presented in the following sections of this chapter suggest similarities as well as differences in losing, and re-establishing market access. Significant sales of sovereign debt by foreign and domestic investors, coupled with soaring borrowing needs often result a surge in interest rates to very high levels. Public debt managers often shorten maturities of new debt (issuing T-Bills) to weather storms. Hence, the stressed market conditions initially manifest themselves with a sudden hike in interest rates and decline in maturities of borrowing instruments. This was the case in Greece, Iceland, Ireland and Portugal during the European sovereign debt crisis. As market conditions have improved in recent years, there has been a significant improvement in maturity of new debt issuance, which in turn helped mitigating refinancing risk in these countries (Figure 3.1).

Figure 3.1. Changes in average term to maturity of new issuance

Source: Debt Management Offices of Greece, Iceland, Ireland and Portugal.

During the European sovereign debt crisis, significant shifts were observed in holder profiles: Initially, many governments faced large sell-offs from foreign investors, were forced to borrow more domestically (leading to an increase in “home bias”). Following the loss of market access and use of massive financial supports from international institutions, the share of marketable debt in total debt fell significantly. Recently, as these countries regained market access as well as upgrades in sovereign credit ratings, the privately owned share of debt increased and holder profiles have begun shifting towards conventional investors. Figure 3.2 shows changes in investor breakdown of outstanding debt in Iceland, and that of allocations in Greece, Ireland and Portugal during the period between 2005 and 2018.

In terms of policy responses, public debt managers aimed at mitigating refinancing risk and regaining investors’ confidence. Therefore, they made use of liability management operations (e.g. buy-back and switches); boosted investor relations programmes; enhanced organizational structure of debt management; built contingency funding tools (e.g. liquidity buffers and credit lines). These experiences, which are discussed further below remain valid today.

Figure 3.2. Investor base changes

Notes: Investor classifications differ across countries. Debt holdings in Iceland, known allocations in Greece, Ireland and Portugal.

Source: Debt Management Offices of Greece, Iceland, Ireland and Portugal.

3.3. Greece

Greece had large public sector deficits before the crisis, received significant financial support from the IMF and the EU through three bailout programmes during the crisis. After losing its access to financial markets in 2010, the country has implemented fiscal consolidation plans and has restructured its existing debt; it emerged from the euro area bailout programme in 2018. Greece has returned to bond markets with occasional bond issuance in recent years, but has not returned to regular schedules of auctions yet.

Economy and public debt dynamics in the run-up to the crisis

The economic crisis in Greece, the problem of fiscal and trade deficits and of public debt encountered is common knowledge. An excessive deficit procedure was opened in 2009, and, as of May 2010, Greece was excluded from the international capital markets.3 The 2007-2008 financial crisis took its toll on the euro area, and mostly influenced the periphery countries whose economies presented weak features (high fiscal deficit, high current account deficit, high ratio of debt-to-GDP, etc). The Greek economy contracted by about 25% between 2008 and 2016. The unemployment rate climbed to nearly 30% in 2013, and Greece’s debt-to-GDP ratio reached an all-time high of 181% in 2016.

The European Commission, the European Central Bank and the International Monetary Fund supported the Greek economy with three bailout programmes in order to address the crisis.

Financial support programmes and restructuring of public debt

The Greek Loan Facility Agreement (GLFA), the first financial support programme for Greece, was agreed in May 2010. It consisted of bilateral loans from euro area countries, amounting to EUR 52.9 billion, and a EUR 20.1 billion loan from the IMF. The European Financial Stability Facility (EFSF), which was only established in June 2010, did not take part in this programme.

The second bailout programme consisted of the EFSF loans of EUR 141.8 billion and a further EUR 12 billion loan from the IMF. It is noted that as a result of the fiscal problems and the government debt crisis in Greece, the country’s financial system also suffered, mainly because of the major exposure of the Greek banks to Greek government securities and of the fear of a disorderly default that sparked a run on deposits. In view of the importance of the banking system for the smooth operation of the Greek economy and the prevention of its collapse, a re-capitalization of the banks was also deemed necessary.

Central to the second programme was the Private Sector Involvement (PSI), which was a restructuring of Greek debt held by private investors (mainly banks) in March 2012, to lighten Greece’s overall debt burden. About 97% of privately-held Greek Government Bonds-GGBs (about EUR 197 billion) took a 53.5% cut of the face value (principal) of the bond, corresponding to an approximately EUR 106 billion reduction in Greece’s debt stock. In return 31.5% of the nominal value (about EUR 62 billion) was covered by new GGBs (the PSI bonds) and 15% was covered by EFSF notes (EUR 29.5 billion). About EUR 7 billion GGBs did not participate in the PSI (holdouts). Furthermore, a total of about EUR 56 billion GGBs was excluded from the PSI, as it was held by the official sector (mainly the ECB & National Central Banks). This is the source of the Securities Markets Programme (SMP) and Agreement on Net Financial Assets (ANFA) bond profits (circa EUR 10 billion expected to be returned to Greece). The core of the loans was the Master Financial Assistance Facility Agreement (Master FAFA) EUR 109.1 billion (circa EUR 11 billion was returned) together with the PSI LM Facility (EUR 29.5 billion) and the Accrued Interest Facility (EUR 4.8 billion).

In December 2012, a buyback operation took place, in which EUR 31.8 billion of PSI bonds were exchanged for EUR 11.2 billion EFSF notes, which constituted the so-called “Buy Back Loan”, resulting in an effective reduction of the outstanding debt by EUR 20.5 billion. Therefore, a 10-year deferral of interest payments due to the EFSF Master FAFA was agreed in order to cover the financing gap caused by the use of the aforementioned EUR 11.2 billion.

Since 2011, Treasury Bills have remained the main debt instrument that Greece could rely on for new issuances via the market. Consequently, the amount outstanding of Treasury Bills rose to a ceiling of about EUR 15 billion. Treasury Bills were issued on a monthly basis, with 26 and 13 weeks maturities. Since 2017 the yields have dropped, from 4.82% in 2011 to 0.90% in December 2018 for the 26 weeks maturity and from 4.10% to 0.71% for the 13 weeks maturity. For the first time since April 2010, 52- week Treasury Bills were issued in March 2018, with a yield of 1.09% in the December 2018 auction. At the end of 2018 the amount outstanding was about EUR 15.2 billion (EUR 4 billion with 52 weeks maturity, EUR 2 billion with 13 weeks and EUR 9.2 billion with 26 weeks maturity).

Mobilizing cash reserves and adoption of buffer policy

In 2014, the Greek Public Debt Management Agency (PDMA) started an effort to mobilize the cash reserves of the General Government Entities (GGEs) – Social Security Funds, Municipalities, Hospitals, Universities, etc. – in order to cover part of the funding needs of the central government. With concentrated legislative actions (mainly Law 4549/2018 National Gazette 105 A 2018), a new framework leading to a Single Treasury Account is set, with a team consisting of the PDMA, the General Accounting Office of the Ministry of Finance and the Bank of Greece, making use of the excess cash reserves of such entities. The ultimate target is the implementation of a holistic and integrated cash management policy for both the State and the General Government Entities, via Repo operations between the PDMA and the GGEs. By the end of 2018 about EUR 24 billion of the GGEs’ reserves was put on Repo transactions. The yields of the Repos incentivized the managers of the entities to join the scheme, which, in the context of intra governmental debt (i.e. being neutral in fiscal terms) is mutually beneficial to the State and the GGEs.

Greece issued via syndication two new bonds, the first issuances after the PSI in 2014. The first was a 5-year bond, EUR 3 billion of nominal value with maturity 17/4/2019, coupon 4.75% and issue price of 99.133%. It was followed by a 3-year bond, EUR 1.5 billion nominal value with maturity 17/7/2017, coupon 3.375% and issue price of 99.650%. The two bonds were tapped in September 2014 by a total of EUR 1.6 billion, in exchange for Treasury Bills held by the four Greek Systemic Banks.

The third programme of assistance was launched in August 2015 by the European Stability Mechanism (ESM) and it consisted of new loans of EUR 61.9 billion.

Steps taken to improve structure of public debt

Measures presented within the EU/IMF financial support programme

In order to reduce vulnerabilities in debt structure, various short, medium and long-term measures were taken in May 2016. Short-term measures consisted of smoothing the EFSF repayment profile, the use of the EFSF/ESM diversified funding strategy to reduce interest rate risk without incurring any additional costs for former programme countries and the waiver of the step-up interest rate margin related to the debt buy-back tranche of the 2nd Greek programme for the year 2017. In this context, a large amount of floating-rate loans has been converted to fixed rate, in order to protect Greece against future rises. By locking in historic lows in euro interest rates the PDMA essentially provided Greece, a B+ rated issuer, with an effective rate that is on par with AA-rated euro-area peers. Also, the weighted average maturity of the EFSF Master FAFA loans, which had fallen to 28.3 years due to some bond swap activity in 2015, was extended to 32.5 years. Around EUR 31 billion of the EFSF and ESM funding, provided during 2012 and 2015 in floating-rate note form to prop up the country’s banks, was swapped for fixed-rate notes.

Medium-term measures for Greece consist of (i) a mechanism for the conditional abolition of the step-up interest rate margin related to the debt buy-back tranche of the second Greek programme from 2018 onwards; (ii) a further deferral by 10 years of both EFSF interest and amortization payments on the EUR 96.4 billion of EFSF Master FAFA; and (iii) an extension of the maximum weighted average maturity on the above-mentioned portion of EFSF loans by 10 years. In addition, the return of 2014 SMP and ANFA profits to Greece (as of budget year 2017) builds an internal buffer intended to reduce Greece’s future gross financing needs. It is estimated that the combined results of the short and medium-term measures will contribute to a reduction of 50-percentage points in the Greek debt-to-GDP ratio in 2060. Of this reduction, 25 percentage points each come from short and medium-term measures.

Greece’s gross financing needs are expected to remain below 15% of GDP over the medium term, and to comply with the 20% threshold in the long run. Therefore, Greece’s debt is considered sustainable. In fact, given the size of debt and the interest rates it is now paying, Greece’s credit costs are lower than many AA-rated sovereigns.

For the long-term, the Eurogroup also agreed to review at the end of the EFSF grace period in 2032, whether additional debt measures are needed to ensure the respect of these gross financing need targets. Also, the Eurogroup committed to long-term technical assistance to boost Greek growth.

Return to bond markets

The PDMA conducted a long-planned Liability Management Exercise (LME) in November 2017, where the agency offered to exchange a strip of 20 government bonds (PSI bonds) issued after the 2012 debt restructuring for five new benchmark issues. This circa EUR 26 billion debt swap had the effect of cutting the liquidity premium on Greek debt, which also resulted in a reduction of the country’s credit spread of 150–170 basis points (bps) across the curve.

In August 2017, Greece issued a new 5-year bond, with maturity 1/8/2022, nominal value of EUR 3 billion, coupon 4.375% and issue price of 98.906%.

Additionally, in February 2018, Greece issued a new 7-year bond, with maturity 15/2/2025, nominal value of EUR 3 billion, coupon 3.375% and issue price of 99.236%.

In parallel, the PDMA persuaded 18 initially unwilling Primary Dealers to provide EUR 35 billion notional amount of euro interest rate swaps to hedge a large proportion of the EUR 52.9 billion of the Greek Loan Facility (GLF). In all, the PDMA’s work over 2018 has dropped the country’s proportion of floating-rate debt to around 10% by the end of 2018. These loans carried an interest rate of three-month Euribor plus 50bps. With rates set to rise in the euro area in the near future, Greece would face an additional EUR 500 million per annum interest payment if rates rose by 1% – close to 0.25%–0.30% of Greece’s GDP (e.g. for a 2% rise, it would be EUR 1 billion).

The PDMA started the hedging programme, constituted by plain vanilla Interest Rate Swaps (IRSs), with just three counterparties in January 2018. The PDMA also offered some “cashflow incentives” to help the programme continue. In all, out of a Primary Dealer group of 21 banks, 18 have finally engaged in such IRSs with the PDMA – 14 foreign banks, and 4 Greek systemic banks. They were done in clips of EUR 250 million or EUR 500 million for a total of about 75% of the total amount of GLF loans, and with an average weighted maturity of 10.5 years. Regarding these loans, the agency managed to change the funding costs of Greece from floating at 3-month Euribor plus 50 bps, to an average all-in cost of 95bps plus 50bps.

Current environment

Greece now has cash reserves of more than EUR 30 billion – sufficient to cover its gross financing needs for the next four years, under very conservative scenarios. Assuming Greece’s presence in the capital markets continues, it will be able to generate excess liquidity. PDMA will look to buy back expensive short-dated, floating-rate debt – e.g. the International Monetary Fund loans, which have an outstanding amount of around EUR 10 billion and weighted average maturity of around 3.5 years. Half of that is charged at about 4.9% due to a step-up feature of the loan. The floating element of the 4.9% is linked to the price of the IMF’s 3-month Special Drawing Rights rate, which is not only expensive, but includes foreign exchange risk that is tricky to hedge.

3.4. Iceland

Iceland, a small economy with its own currency, had a strong fiscal position with high exposure to foreign investors before the crisis hit. In response to the crisis, the government introduced capital controls, along with austerity measures and a series of reforms. The crisis had an impact on debt management practices on wide a range of issues, including organizational and regulatory changes, improvement in risk management and transparency practices.

Economy and public debt dynamics in the run-up to the crisis

Iceland has come a long way since passing emergency legislation in the autumn of 2008 and shortly afterwards taking the extraordinary measure of adopting capital controls. These actions were undertaken in response to extreme circumstances and addressed a specific situation; they were aimed at protecting the interests of the Icelandic nation and ensuring the stability of the country’s economy. Iceland’s strong fiscal position when the crisis hit helped enormously in dealing with the situation. In preceding years, the government had focused on running a budget with an overall surplus and used this to reduce outstanding debt. Total Treasury debt relative to GDP was 23% at year-end 2007, a favourable debt position that enabled the Treasury to shoulder very significant amounts of debt related to the crisis.

The unprecedented economic collapse in Iceland in October 2008 demanded clear and decisive action to respond to this exceptional situation. The government’s objectives were clear: to ensure economic, fiscal and currency stabilization without compromising Iceland´s real economy and its welfare model. The problem faced was not a sovereign debt problem but primarily a balance of payments problem with a capital overhang seeking an exit estimated at around 70% of GDP. This overhang was a result of carry trade including investments in the failed banks. All decisions made were focused on ring-fencing the sovereign, securing the payment system and stabilizing the currency.

Iceland signed a Stand-By Arrangement (SBA) with the IMF in late 2008 and, as part of the agreement, obtained loan facilities from the Nordic countries, Faroe Islands and Poland as well as the IMF. These funds were used to build up the foreign reserves of the Central Bank. The fiscal outcome was strongly negative from 2008 onwards, and the accumulated deficit reached as high as 25% of GDP at its peak. In addition to the SBA facilities the Treasury took on substantial debt to fund the fiscal deficits.

Introduction of capital controls and recapitalization of the banking system

The steps taken regarding the financial sector were somewhat unique as the three large commercial banks were not split into good/bad banks but rather domestic and foreign operations, with the former transferred to new banks and the latter remaining with the old failed banks. The Treasury recapitalized the banking system and secured the Central Bank´s equity position through bond issuance. In total, the cost of recapitalizing the financial sector amounted to around 30% of GDP. Total general government debt peaked at roughly 100% of GDP in 2011. This four-fold increase in total debt resulted in Treasury interest expenses increasing to 5% of GDP at their highest.

Iceland’s access to foreign financial markets had practically closed as early as late 2007. Capital controls helped to facilitate domestic purchases of the increased supply of government bonds and bills. By far the largest investors were the pension funds who, at the time, were locked in behind the capital controls and therefore forced to invest domestically. The investment needs of the pension funds are equivalent to around 5% of GDP yearly. So, fortunately, their capital looking for investment dovetailed neatly with the Treasury’s increased financing needs. The debt issuance programme was characterised by a high level of transparency, which was welcomed by investors.

Interest rates rose significantly in late October 2008 and even though they subsided somewhat in subsequent months, sovereign interest expense increased greatly. Bond issues from late 2008 until 2010 bore 8%-8.75% nominal interest. Interest rates then began to drop in 2010, and the latest new non-indexed Treasury bonds have a 5% coupon.

Re-establishing international market access

Once economic development in Iceland started to improve, efforts began to re-establish international market access. In 2011, the Treasury issued a 5Y USD-denominated bond with a fixed interest rate of 4.875%. In 2012, market access was confirmed with another 10Y issue at a rate of 5.875%. The proceeds from these issues were used to pre-pay most of the SBA facilities from the Nordics taken in the aftermath of the financial melt-down in 2008. In 2014, the Treasury issued its first EUR bond since 2006, a 6-year issue with a coupon of 2.5%. The rest of the Nordic facilities were repaid and the following year the Treasury and the Central Bank paid in full the remainder of the program loans.

In 2011, the authorities announced a revised long-term strategy for capital account liberalisation. The strategy was set out focusing on forging a unique solution between private entities. Several steps were taken in the first years, but following the launch of a renewed comprehensive strategy for capital account liberalisation in the spring of 2015, authorities reached a consensual agreement with the creditors of the failed banks’ estates and their respective winding-up boards.

From the authorities´ point of view, it was essential that the resolution of the estates should not destabilize the balance of payments going forward. The estates of the fallen financial institutions finalised composition agreements by the end of 2015, by accepting the so-called stability conditions put forward by the Central Bank of Iceland and the government. These resulted in those estates voluntarily transferring assets worth almost 20% of the country’s GDP to the Treasury as stability contributions. The next phase in the liberalisation strategy involved offshore ISK holdings, of which a small portion remains and should be dealt with this spring. The third and last phase of the strategy consisted of restrictions on residents´ capital movements, which were removed in the spring of 2017.

Implications of the crisis for public debt management framework

Organizational changes in debt management

Treasury debt management was in the hands of an independent institution until 2007, when this was abolished, and daily administration and management of central government debt was transferred to a special division within the Central Bank, Government Debt Management, under a contract between the Ministry of Finance and the CB. Government Debt Management ensures that borrowing and debt management comply with the strategy set out by the Ministry. In 2010, an attempt was made to strengthen the organisational structure and increase coordination, supervision and overview of debt management issues within the Ministry by appointing a new Head of Funding and Debt Management to work closely with GDM on debt management issues.

Enhancing transparency and predictability

In the wake of the crisis increased emphasis was placed on transparency and predictability in debt management. That proved to be an important factor in rebuilding confidence and restoring trust in the economy and state finances. Systematic promotional work, e.g. through meetings with investors, bankers, rating agencies and other stakeholders, ensured they were informed and updated on developments and prospects in Iceland. These efforts had a positive effect on investors, as subsequently demonstrated by high demand for Treasury paper when Iceland began to access international capital markets again. The fact that Iceland consistently delivered on, and even exceeded plans and forecasts, was doubtless no less important in boosting market confidence. As was adhering to a realistic strategy.

The rating agencies were a key focus from 2008 onwards and direct efforts were made to keep them well informed about developments in the country. Even though the rating upgrades came at a rather slow pace, Iceland was back in the A category of all the rating agencies within 10 years’ time.

In addition to the above, some other changes were made to increase transparency and predictability in debt management following the crisis. An annual prospectus for issuance had been published for years but in 2010 a very important step was taken when a Medium-Term Debt Management strategy was introduced. The Medium-Term Debt Management Strategy (MTDS) lays down the government’s plans for financing its activities for the next 5-year period. The aim is to map out a clear policy with quantitative targets, thereby creating a framework for more specific debt management measures. Its principal objective is to ensure that the Treasury’s financing needs and obligations are met at the lowest possible cost consistent with a prudent risk policy. It is also intended to encourage further development of efficient domestic primary and secondary markets for government securities. Besides setting out debt management objectives and guidelines, the strategy describes the current composition of the debt portfolio, inherent risk factors and contingent liabilities. It also explains the institutional structure of debt management and how information disclosure to market agents and investors is carried out.

Building up a liquidity buffer

In consultation with the IMF, the decision was taken to build up strong liquidity buffers after the crisis, both in domestic currency as well in FX. The domestic buffer target was set at ISK 120 billion (around 6% of GDP), sufficient to meet the largest payments due and debt service for almost one year. Similarly, Treasury held FX assets against foreign reserve loans, so that its net FX position was close to neutral. These significant buffers played an important role in re-establishing stakeholders´ trust in the sovereign. As the years passed, and its importance waned, the domestic buffer was lowered to ISK 80 billion and then again to ISK 40 billion. As capital account liberalisation progressed, the need for large foreign reserves also diminished.

Use of liability management exercises

At the beginning of 2017, the Treasury adopted an active liquidity management program. It allows the Treasury to take and grant short-term loans in the market to smooth out fluctuations in its deposit accounts. The aim is to maintain a deposit balance as close as possible to ISK 40 billion at any given time. Conditions could arise necessitating higher balances for a short period – for instance, when large Treasury bond maturities are drawing near. At year-end 2018, the Treasury´s cash balance was around ISK 104 billion, well over target, but in anticipation of a large note issue maturing in early February. The decision on setting the target of ISK 40 billion, took into account the largest anticipated fluctuations in Treasury´s cash flow, both positive and negative. The first loan agreements in connection with liquidity management were made in Q1/2017. Their frequency increased gradually in 2017, but then diminished in 2018 due to market conditions. At the same time, predictions of the Treasury’s liquidity position have become more accurate, as they are based on estimated daily revenues and expenses, together with payment flows from revenues and loans granted.

In the past four years, the Treasury has undertaken several liability management exercises. In 2015, it repurchased half of the outstanding amount of a bond issue maturing in 2016. In the spring of 2017, a tender was made for the entire outstanding amount of a bond issue maturing in 2022, with almost 90% participation. In December 2017, the Treasury made an offer for all the outstanding amount of its EUR bond issue of 2014. Investors holding around 53% of the issue accepted the offer. In tandem with this buy-back, the Treasury issued a new EUR bond of 500 million maturing in 2022 with a 0.5% coupon.

An enhanced risk management framework for contingent liabilities

Risk management and management of contingent liabilities have improved steadily over the last 10 years. However, one of the most important factors contributing to fiscal stability and debt sustainability is the adoption of the Organic Budget Act in late 2015. This legislation promises to reform and improve the overall premises and framework of fiscal policy-making and budget implementation, emphasising longer-term planning, sustainability and prudence. The Act contains a fiscal rule based on a set of generic values, together with quantitative parameters, which essentially focus on medium-term fiscal balances, debt limits and debt reduction. These parameters largely correspond to those incorporated in the Fiscal Compact to which many EU countries have subscribed. During the budgeting process and long-term planning, increased emphasis has been placed on risk and scenario analysis and stress tests. Further improvements are intended in coming years.

Current environment

Against the background of sustained economic growth achieved in recent years, central government debt has fallen steadily from its peak at around 90% of GDP in 2011. The overall debt trajectory has been even more favourable than anticipated. A strong economic and fiscal position, together with an improved regulatory framework, provide Iceland with a solid base going forward. Gross central government debt is expected to be close to 20% of GDP by end 2023, according to the current fiscal plan.

Numerous lessons learned during the crisis – and the bail-in principle adopted with the emergency legislation enacted by the Icelandic Parliament in October 2008 – have played a positive role in shaping current thinking on how to respond to, and to mitigate financial crises. While government debt is low by comparison with other OECD countries, the objective going forward will be to maintain an acceptable level of outstanding debt. Furthermore, compared to many OECD countries, Iceland´s demographics are relatively favourable, which is an important factor for assessing long-term fiscal sustainability. The focus, going forward, will be on creating an environment, in which the economy can foster and build increased resilience.

3.5. Ireland

Ireland lost its market access in 2010 and made a full return to bond markets in 2014, following the end of its three-year EU/IMF Programme. This section summarises the challenges faced from a debt management perspective during this stressed market period from losing investment grade status to losing market access. It also outlines some of the key responses and steps taken on the way to return to full market access, including addressing refinancing risk, enhancing investor relation programme and changes in the auction pricing model.

Economy and public debt dynamics in the run-up to the crisis

The size and composition of Ireland’s General Government Debt (GGD) has changed significantly since the early 2000s. For example, in 2006 GGD amounted to only 28% of modified Gross National Income (GNI).4 This debt was largely comprised of fixed-rate bonds and retail debt products.

Ireland’s property bubble burst in 2007 and then it was hit by the 2008 global financial crisis. Its domestic banking system nearly collapsed. The Government was ultimately forced to recapitalise the banks, following the blanket guarantee of September 2008. It injected up to EUR 64 billion (50% of GNI in 2011) into the banks to restore their capital base.

Nominal GDP contracted by 10% in 2009, while unemployment rose to 16% of the labour force at the peak. Liquidity conditions in the banking system deteriorated and Ireland’s Government bond market came under severe pressure. Ten-year bond yields increased rapidly towards 9%. The State had to withdraw from financial markets and ultimately enter a financial assistance programme in November 2010.

The Government agreed, on 28 November 2010, to a three-year financial support programme for Ireland by the EU and IMF. The programme amounted to EUR 85 billion, with EUR 17.5 billion of this coming from Ireland’s own resources – its National Pension Reserve Fund. External support amounted to EUR 67.5 billion, including funding from the IMF, EFSF, EFSM and bilateral loans from the UK, Sweden and Denmark.

A phased approach to regain market access

The Programme of assistance gave Ireland breathing space, yet it faced huge challenges. For Ireland’s National Treasury Management Agency (NTMA), the technical difficulties included reduced credit lines from market counterparts and requirements for daily collateral margining. Ireland undertook a phased approach to regaining market access. This was divided into three key stages: Preparatory-work, phased re-entry and normalised market access. The first step involved transparent communication with market participants, significant investor engagement and a credible recovery plan outlined by the State. This was followed by short-term issuance, opportunistic switches and product diversification. The final stage saw a return to a regular schedule of bond auctions.

Preparatory Work

During the preparatory work phase, communication with investors and wider market participants was key. Despite being locked out from private debt markets, the NTMA led Ireland’s re-engagement with investors and rating agencies. Ireland’s story had become complicated and needed to be explained.

Maintaining strong relationships with Primary Dealers (PDs) was also an important part of the strategy. This was difficult in an environment when Ireland was not issuing debt. PDs were important for their market knowledge, secondary trading role and significant investor connections.

In May and June 2011, the NTMA completed its first non-deal roadshow to Europe, the United States and Asia. This trip unearthed pioneering investors who bought in large size in the secondary market. Ireland’s bond prices bottomed in July 2011. For the following three years, the NTMA covered each investor centre in Europe, North America, Asia and the Middle East at least once annually. The Treasury built rapport with investors, while outlining the path to recovery. The message was to under-promise on Programme targets, counting on the Government to over-deliver.

Communication with official institutions was also imperative. The Government met the EU/IMF Programme targets and delivered on the fiscal reforms as promised. They also put in place the necessary policies to address the banking crisis. The domestic banks were heavily recapitalised and restructured in the first quarter of 2011. The Government also outlined a path towards a primary budget surplus, which was achieved by 2014.

Ireland’s Government bonds remained under pressure until the low of July 2011. Ten-year bond yields peaked at 14%, while spreads over Germany were 11 percentage points. Other European countries were facing similar crises. Rating agencies had significantly downgraded Ireland’s sovereign rating. Ireland faced a series of downgrades between 2009 and 2011. During that period, the rating went from AAA to BBB+ with Standard & Poor’s and Fitch and to sub investment grade with Moody’s. A return to full market access was not achievable in 2011, yet the NTMA maintained a presence in the Euro Commercial Paper (ECP) market. This enabled the NTMA to raise short-term money and to stay in contact with both Primary Dealers and market participants. Retail debt also remained an important funding source during this period as consumers moved from the domestic banks in favour of the sovereign.

Re-entry phase

By 2012, Ireland had built a track record under the EU/IMF Programme. The banking reforms and fiscal consolidation between 2009-2011 were increasingly recognised by the market. The NTMA communicated this progress to market participants in a systematic way through non-deal roadshows, conference calls and email updates. Market prices began to recover which allowed Ireland to start its phased re-entry into the debt market.

During this stage, the NTMA looked for opportunities to undertake strategic issuance and switching activity, gradually moving to longer-term instruments. This started with a switch in January 2012. Ireland exchanged EUR 3.53 billion, or 30% of the outstanding 2014 bond, for a new 2015 bond. This was an opportunistic transaction. The timing was favourable and was linked to the introduction of a three-year LTRO facility by the ECB. Further switching activity was undertaken later in 2012.

In July 2012, the NTMA resumed auctions under its short-term Treasury Bill programme. The first T-Bill auction saw three-month money issued at 1.8%. While the size was small and the tenor short, it had the effect of announcing a return prompting investors to reinstate credit lines for Ireland. These auctions continued throughout 2012 and 2013, with rates falling quickly as market presence was re-established and the recovery took hold.

Improvements in the overall market environment further assisted Ireland’s efforts with market re-engagement. One of the most significant was the ECB announcement on Outright Monetary Transactions (OMT) in August 2012. This development further improved market sentiment towards the Irish bond market. The NTMA was able to issue a new five and existing eight year bond on a switch basis, just one month after returning with three month treasury bills. Further interest rate reductions and term extensions on Ireland’s official borrowings were also seen as positive developments, which lowered borrowing costs.

Significant landmarks were reached in 2013. Ireland issued bonds by syndication for the first time since losing market access. The first of these was a syndicated tap of the five year bond in January. A total of EUR 2.5 billion was issued at a yield of 3.32%. This was followed by a new ten-year bond in March 2013, the first new 10-year issuance since January 2010. A total of EUR 5 billion was issued, maturing in March 2023. The yield was 4.15%.

Despite these early successes, the NTMA did not yet believe that it had restored full access to the market. Ireland had not undertaken any auctions since 2010 - issuance to date was largely opportunistic. The NTMA made or supported a number of other policy decisions to both improve debt sustainability and prudently manage the large debt stock. This included the second extension of EU loan maturities (EFSF and EFSM), the conversion of the IBRC Promissory Note to long-term Floating Rate Notes, and the build-up of prudential cash balances.

Full market access

At end-2013, Ireland was well positioned to exit from the EU/IMF Programme on schedule. The NTMA had undertaken pre-funding, building up prudential cash balances to cover the next 12-15 months requirements. This strategy allowed Ireland to exit the Programme without the need for a precautionary credit line.

The aim at this stage was to reinforce the reputation of Ireland as a stable and sustainable participant in debt markets. During 2014, Ireland announced an annual funding plan and held regular bond auctions, issuing almost EUR 12 billion in long-term bonds.

A return to a regular schedule of auctions was important, to allow greater liquidity in Irish government bonds. The model changed to a single-price auction, at the recommendation of Primary Dealers. This was to reduce over-bidding and make the auctions more accessible to clients. During 2014, the NTMA also undertook a liability management exercise in the form of a bond buyback and switch of the bond maturing in April 2016. This extended the weighted average life of the outstanding debt profile.

Credit rating changes, including an important upgrade by Moody’s to investment grade, finally reflected these emerging trends. Therefore, 2014 was deemed to be the year in which full market access was restored.

Current market environment

Ireland’s return to the primary debt markets was challenging. The size and extent of the financial crisis led to a deep loss of confidence. It therefore involved a concentrated focus on investor engagement, short-term issuance, opportunistic transactions, and finally the return to regular auctions. At the same time, favourable current conditions have cemented Ireland’s market return. This has been assisted in part by the introduction of a quantitative easing programme by the ECB, keeping interest rates low and driving investor appetite for long-dated bonds.5 Since 2014, Ireland has issued close to EUR 70 billion, at a weighted average maturity of 13 years, and a weighted average yield of 1.4%. The Government debt ratio peaked at 120% of GDP in 2012 and fell to 68% at end-2017. It should be noted that the recent decline in the GGD/GDP ratio is primarily as a result of a sharp rise in GDP stemming from the activities of multinational companies based in Ireland.

There has been a strong turnaround in Ireland’s debt dynamics. This is due to the measures taken by the Government to improve the public finances, the return of economic growth and the measures taken at a European level to calm the wider euro crisis. Ireland has now fully repaid the IMF loan of EUR 22.5 billion. This was repaid early and replaced with lower cost market funding. Ireland has also made efforts to smooth its debt profile, buying back shorter-dated bonds. As a result, the refinancing requirement for the 2018-2020 period has been almost cut in half. The estimated weighted average maturity of Ireland’s long-term marketable and official debt was 11.2 years at end-2017.

Nevertheless, Ireland recognises the still-elevated levels of public debt.6 The NTMA remains focused on the task of borrowing on behalf of the government and managing the national debt in order to ensure liquidity for the Exchequer, and to minimise the interest burden over the medium-tern. The NTMA attached significant importance to monitoring liquidity conditions in the government securities markets, regulatory changes and the trends in Primary Dealer markets.

Looking forward, it is important to remain engaged with investors and increase efforts to diversify both the investor base and sources of funding. With this in mind, the NTMA continues with its investor relations programme, undertaking regular visits to the United Kingdom, the United States, Europe, and Asia. The NTMA’s strategy has been to focus on longer-term holders of government debt, increasingly in continental Europe. The NTMA’s issuance of Ireland’s first sovereign Green Bond in 2018 was an important diversification step. A total of EUR 3 billion was issued at a yield of 1.4%. This accessed a new category of investor and provided a new debt instrument that meets untapped investor demand.

3.6. Portugal

Sovereign debt dynamics, which were already weak before the crisis, deteriorated further during the crisis. With limited market access between 2011 and 2013, the debt management office took a vigilant approach in re-engaging with markets. In this respect, priority is given to reducing refinancing risk, broadening investor base, and building cash buffer against liquidity risk.

Economy and public debt dynamics in the run-up to the crisis

The Portuguese economy was subject to two very significant shocks in the late 1990s, which likely had a considerable impact on the accumulation of macroeconomic imbalances, which emerged in the late 2000s. The global economic integration of emerging economies, from the Eastern European countries to the Far-East Asian countries (not least since China’s entrance in the WTO), implied a very significant increase of the competition faced by Portugal’s most traditional exporting sectors. On the other hand, the run-up to the euro area implied an abrupt reduction of nominal interest rates (e.g. the 3-month money market rate declined from 18% in 1991 to close to 4% in 1998), which boosted domestic demand and significantly reduced savings.

In the subsequent decade, the current account posted consecutive deficits in excess of 5% of GDP, which were perceived at the time to be at the core of a new investment cycle that would enhance productivity, but were actually coupled with a poor economic performance, as GDP growth averaged little more than 1%, diverging from the euro area. This implied a significant increase of external debt (the international investment position deteriorated from -10% of GDP in 1996 to about -100% in 2008), which left the Portuguese economy highly vulnerable to the shocks that hit the global economy, and in particular the euro area from late 2009.

Following Greece and Ireland in 2010, Portugal requested economic and financial assistance from the IMF, EC, and ECB (henceforth EU-IMF institutions) in April 2011. The 3-year Programme involved a financing package amounting to EUR 78 billion, which was defined to cover the State’s borrowing needs until September 2013.

As the market risk perception on the Portuguese sovereign debt mounted in 2011, the issuance of medium- and long-term (MLT) bonds was suspended and the stock of T-Bills was cut by almost 40%, with a sole focus on 3- and 6-months maturities. Outstanding retail instruments also dropped significantly. Hence, at the end of 2011 the debt composition changed substantially, with the most common components declining, while EU-IMF loans already accounted for roughly 20% of the total.

Reactions to the challenges in debt management between 2012 -2013

Implementation the EU-IMF programme

The early stages of the EU-IMF Programme were marked by a continued deterioration of market conditions. When the Portuguese rating was downgraded below investment grade, some investors were forced to sell their positions in Portuguese Government Bonds (PGBs) at short notice, as the instruments dropped out from relevant market indices. Until the end of 2011, Portugal was out of the MLT debt market, but it maintained the T-bill programme active, although the market changed completely, becoming mainly domestic driven as international accounts were leaving the country and, for a period of nine months (until Dec-2011), it was only possible to issue 3- and 6-month maturities. The average rates were close to 5%, the average maturity at year-end 2011 was close to 45 days and the total size of the programme decreased to EUR 11 billion. Hence, the financing needs over this period were solely covered by EU-IMF loans, which were front-loaded to cover the redemption of MLT debt, the reduction of the T-bill and retail debt stocks, and still allowed a substantial increase in the cash position.

Re-engaging with the investor base

The first stage of the process to regain market access can be placed in the beginning of 2012, as some early signs of market stabilization emerged. In the run-up to the exit from the Programme that was scheduled for the 2nd quarter of 2014, Portugal started to prepare for regaining full market access. Portuguese authorities embarked on a number of marketing actions directed to the traditional European investors, but perhaps more interestingly, directed to investment communities in the United Kingdom and the United States. As some of these investors were more familiar with adjustment processes in other jurisdictions (outside the euro area), they were in a more favourable position to assess the success of the Portuguese Programme. The investor base had shifted significantly, as a consequence of the change in credit risk perception. While more traditional “buy-and-hold” investors, as pension funds and insurance companies, left the PGB market, newcomers, as hedge funds, notably from the United States, took a more active participation. There was some evidence of market stabilization, as secondary market flows from non-residents turned positive (namely from the United Kingdom and the United States and Primary Dealers’ quoting compliance resurfaced.

Figure 3.3. Effects of the Financial Assistance Program in Portugal

Source: Debt Management Office Portugal.

The T-bill market started to improve, and the steady decrease in rates allowed the Portuguese Treasury and Debt Management Agency (henceforth IGCP, Agência de Gestão da Tesouraria e da Dívida Pública) to extend the maturities up to 18 months. By year-end 2012, the average maturity was 6 months and the total size of the programme was EUR 17 billion. IGCP also decided to adopt higher remuneration conditions for Saving Certificates (CA), reversing the downward trend in the stock of these instruments.

Addressing refinancing risk

Portugal progressed in correcting macroeconomic imbalances. In particular, the current account balance turned positive in 2013, fiscal consolidation brought down the structural deficit by about 7 percentage points of potential GDP between 2009 and 2013 and a broad array of structural reforms were implemented. One of the main challenges of the transition period was posed by the large borrowing requirements in the near future, which made Portugal more prone to unanticipated external shocks. Despite the fact that 2014 was fully funded in 2013, Portugal had a heavy calendar of financing needs in the following years, and requested, together with Ireland, an extension of the weighted average maturity of EFSM/EFSF loans for a period of 7 years. As preparation for the first syndicated deal since the start of the Programme, an exchange offer was conducted (1-year bond for a 3-year bond), minimizing the refinancing needs for upcoming years. The marketing actions taken, together with this liability management transaction, proved crucial for the first syndicated deals of MLT debt conducted in early 2013. In effect, Portugal executed the first syndicated deal, printing EUR 2.5 billion of the existing 5-year benchmark in January 2013. In May, a new 10-year benchmark bond (amounting to EUR 3 billion and priced at around 5.7%) was launched through yet another syndication. The success of these transactions can be assessed by diversified investor participation and positive performance in secondary market. The T-Bill programme became more regular with a combination of short- and long-term maturities, rates came down to levels closer to other European countries, and international participation started to broaden.

Exit from the EU-IMF Programme

Despite maintaining the sub-investment grade status, the three major credit rating agencies also took the first positive steps in this period: Moody’s upgraded the rating by two notches (from Ba3 to Ba1, in May and July 2014), while Fitch (BB+, positive outlook in April 2014) and S&P (BB, stable outlook in May 2014) improved the outlook. IGCP launched a new fixed rate debt instrument (i.e. Savings Plus Treasury Certificates) designed for retail investors, promoting the medium-term savings of households and hence widening the domestic investor base – in total, the retail market would surpass EUR 9.5 billion between 2013 and 2015. Early 2014 was marked by a strong improvement of the PGB credit risk, as the 10-year PGB-Bund spread in the secondary market declined from more than 400bps to around 200bps, and IGCP tapped the 5- and 10-year bonds in January and February, for a total amount of EUR 6.25 billion anticipating the repayment of debt securities maturing in forthcoming years, smoothing the redemption profile, extending duration and conveying a positive message to the market. The next logical step was to resume PGB auctions, which occurred in April, with a EUR 750 million tap of the 10-year benchmark.

Before reintroducing auctions as the common venue for MLT debt issuance, the auction type was re-addressed in the end of 2013, beginning of 2014. Several in-depth analyses suggested that the single-price or Dutch auction method is more adequate to clear markets that observe higher volatility, because it has higher transparency and it incentivises participation from investors who may be less informed. To address the risk of overbidding that this price method may involve, IGCP adopted some monitoring indicators, which were included in the Primary Dealers’ regular performance appraisal scoreboard. As a result of this analysis, IGCP decided to introduce the single-price auction method. Portugal exited the EU-IMF Programme in May 2014, according to schedule, without drawing down the final tranche.

Restoring full market access

From June 2014 onwards, Portugal not only reinforced market access by holding regular bond auctions in different maturities, but also widened the investor base, achieving a very remarkable issuance in EUR on the 10-year bucket, amounting to EUR 4.5 billion. Afterwards, new syndicated issuances were conducted in longer maturities. These deals provided clear indications that the PGB market was attracting strong investor demand, with a high quality book, well-representative of full market access. In the T-Bill market, in 2015, IGCP changed the issuance pattern, reducing the number of lines available, in order to make each line bigger and more liquid, as the total programme size remained fairly constant. The issuance calendar continued to have one auction per month, but redemptions occurred only once every two months. Liquidity improved and bid-offer spreads became even tighter, approaching Italian and Spanish levels.

Medium and long-term policy responses

In the Portuguese debt market, turnover decreased significantly during the EU-IMF Programme and the bid-offer spreads increased sharply. While both these indicators are now similar to what could be observed before the crisis, the volatility is still substantially higher, which may be a symptom of a less efficient price discovery process and/or lower credit rating than prior to the crisis. In the last years, Portugal has re-established market confidence with regular issuance of both bond auctions and syndications. However, the need for more flexibility can be attested by the fact that the weight of syndications in the overall MLT debt issuance is now higher than before the crisis (about 50% in 2014-15, as compared with less than 20% in 2010). Moreover, the average maturity was significantly extended, reaching more than 8 years, and in 2014-15 the share of issuance in the 15-30y bucket represented almost 20% of the total issued amount. Regarding the domestic and international allocation in PGB auctions, domestic Primary Dealers take up 10%-15% of an auction on average. Since 2013, net issuance of retail instruments has averaged more than EUR 2 billion/year, with the outstanding amount of these instruments reaching a historical record of more than EUR 20 billion at the end of 2015.

Investor base: The investor base changed significantly during the Programme. Before the crisis, the allocation was very well balanced across euro area countries and a strong distribution among pension funds and insurance companies. In the first issuances after entering the Programme, there was a strong take up from the investors in the United Kingdom and the United States, specifically from hedge funds. More recently, while there is a clear shift towards a distribution closer to the one observed pre-crisis, there is still a strong take-up from the United Kingdom and domestic investors. Moreover, the weight of debt securities held by non-resident private investors is still significantly lower than before the crisis, but similar to that observed in other peripheral countries. The change of investor base implies a continuous and close communication with existing and prospective investors, crucial to increase their awareness on the execution of the financing programme at each point in time, and hence minimize the risk of surprising the market at any new issuance announcement.

Lessons learned from the debt crisis

Flexibility and consistency: One of the main lessons of the sovereign debt crisis was that DMOs need to constantly adapt to challenging and shifting environments and market access is mostly a “work in progress” objective. On the one hand, the uncertainty and relatively low liquidity that has characterized the market since the crisis implies the need for more flexibility in executing the issuance programme (e.g. higher cash reserves; auctions announced with a shorter lag; to perform extra liability management exercises - exchange offers - in order to prepare the market before new syndications; more issuance through syndications and less via auctions). On the other hand, IGCP acts consistently in terms of its debt issuance, following an adequate balance between predictability and flexibility.

Communication: A comprehensive investors’ presentation, with an encompassing description of the recent developments in the Portuguese economy and financing programme, is regularly updated at IGCP’s website, together with brief research notes on major macroeconomic developments. Regarding the issuance strategy, IGCP adopted a conservative approach with the intention to deliver a reliable message.

Redemption profile: Since mid-2012, IGCP carried a strategy based on smoothing the redemption profile and extending duration, in order to mitigate the refinancing risk. As preparation for the first syndicated deal, an exchange offer was conducted on October 3rd, 2012, where a 1-year bond (maturing in September 2013) was bought, in exchange for a 3-year PGB (October 2015), thus minimizing the refinancing needs for upcoming years. And since then, buybacks and bond switches have been present in IGCP´s annual funding strategy.

Cash position: The State’s cash position is now substantially higher than before the crisis: it averaged a little more than EUR 1 billion between 2005 and 2010, but it has been in excess of EUR 10 billion since Jun-2011, as IGCP has a general objective of pre-emptively financing about 40-50% of the following year’s financing needs. As explained above, this has been an important feature to inspire confidence among investors and to avoid issuance pressure in times of market volatility.

PDs and evaluation: An interesting feature of the Portuguese case is that, unlike what happened in other euro area countries, the number of PDs has actually increased since the crisis. Primary dealership evaluation has been shaped up in the past couple of years to facilitate a more effective delivery of debt management objectives. Despite the fact that some operational objectives have shifted during the process of regaining full market access, primary dealership incentives have always been directed at strengthening liquidity provision, as market access hinges decisively on secondary market liquidity. Over this period, several changes have been introduced in the PDs’ performance appraisal, to reflect the different stages of the process of regaining market access, with the emphasis on broadening the investor base still playing a more relevant role than before the crisis (Figure 3.4).

Figure 3.4. Primary Dealer Performance Appraisal, Portugal

Source: Debt Management Office of Portugal.

References

Guscina A., S. Malik, and M.Papaioannou (2017), “Assessing Loss of Market Access: Conceptual and Operational Issues”, International Monetary Fund Fiscal Affairs Department, Washington DC, https://www.imf.org/en/Publications/WP/Issues/2017/11/15/Assessing-Loss-of-Market-Access-Conceptual-and-Operational-Issues-45347

OECD (2013), OECD Sovereign Borrowing Outlook 2013, OECD Publishing, Paris http://dx.doi.org/10.1787/sov_b_outlk-2013-en

OECD (2014), OECD Sovereign Borrowing Outlook 2014, OECD Publishing, Paris, http://dx.doi.org/10.1787/sov_b_outlk-2014-en

Bassanetti Antonio, Carlo Cottarelli, and Andrea Presbitero (2016), “Lost and Found: Market Access and Public Debt Dynamics”, IMF Working Paper, WP/16/253 December, 2016, https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Lost-and-Found-Market-Access-and-Public-Debt-Dynamics-44498

World Bank (2005), “Public Debt and Its Determinants in Market Access Countries”, March 2005, the WB, Washington DC, http://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1225740508953/MACCaseStudiesMar05.pdf

Ireland NTMA (2017), “Annual Debt Report 2017”, Ireland National Treasury Management Agency, Ireland Dublin, https://www.ntma.ie/publications/2018

Notes

← 1.  Country sections in this chapter provided by the national debt management offices of Greece, Iceland, Ireland and Portugal. An earlier version of the discussions concerning Ireland and Portugal were published in a discussion paper “Accessing sovereign markets – the recent experiences of Ireland, Portugal, Spain, and Cyprus” by the European Stability Mechanism in June 2016.

← 2.  Market access is often referred to a sovereign’s ability to obtain necessary funding with reasonable and sustainable conditions in financial markets.

← 3.  This is based on decisions 2009/415/ΕC of the Council of the European Union – ΕΕL135/30-5-2009, 2010/320/ΕU and decision of the Council of the European Union – ΕΕL145/11-6-2010.

← 4.  Gross National Income (GNI) is a metric created by the Central Statistics Office to modify GDP for the impact of multinationals’ activities.

← 5.  Between March 2015 and December 2017, the ECB purchased EUR 1.9 trillion in the euro area public sector bonds. Irish Government bonds accounted for just over EUR 25 billion of this total purchasing amount.

← 6.  The absolute level of debt remains high as Ireland’s general government debt was over EUR 200 billion in 2017.