analysis of depth and thinness of the debt market of the following countries: Hungary, Greece, Latvia, Italy and Iceland

1. COMPARATIVEANALYSIS OF
DEBT MARKET IN HUNGARY,
GREECE, LATVIA, ITALYAND
ICELAND
Made by:
Gauri, Praneetha, Prashant, Prithvij and Ritu

2. What is a Debt Market
• A Bond Market ( Debt Market) is a financial Market
where participants can issue new debt ( Known as
Primary Market) or buy and sell debt securities (
Known as Secondary Market)
• The primary function of a bond market is to transfer
capital from savers to issuers or organizations
requiring capital for projects, business expansions and
ongoing operations.

3. • The Bond market primarily includes government-
issued securities and corporate debt securities.
• The Depth of a Market is defined by its ability to
sustain relatively large market orders without
impacting the price of the security.
• Therefore, a market would be considered deep if a
large order is required to change the price of the
securities issued.

4. HUNGARY

5. Bond Market in Hungary
2 Types of Bond Markets
I. Government Securities Market
i. Two year Maturity
ii. Three Year Maturity
iii. Five year Maturity
iv. Ten year Maturity
v. Fifteen year maturity
II. Corporate Bond Market

6. Government Bond Market
• Developed and Mature Market.
• One of the Most liquid markets in the Central
and Eastern European Regions.
• 2 main driving Forces
Need to reduce rollover forces: done by lengthening
the maturity spectrum of bonds
Need to Mitigate exchange rate risk: Issuance of
local currency denominated Bonds

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

8. Corporate Bond Market in Hungary
Not very deep compared to their government bond
market
Exchange Rate Regime: Companies favored foreign
currency debt as domestic interest rates were higher
than the some of depreciation paths and foreign
interest rates.
Hungarian Privatisation Strategy: Favoured sale of
assets to professional investors and international
financial investors.

9. Structural Problems: Lack of sufficient rating
agencies and appropriate hedging instruments made
corporate bonds risky.
Lack of Liquidity: issuance costs and pricing
problems.

10. Current Scenario
• Financial Sector stability and covergence- related
issues are facilitating well functioning of a corporate
debt market.
• Additional boost through development of derivatives
market (especially interest rate derivatives)
• Credit Rating : Non Investment Speculative Grade
Standard and Poors : BB
Moody’s : Ba1
Fitch’s BB+

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

12. Italy

13. Overview of the Italian Debt Market
• The main Italian debt securities market is the Mercato
Telematico delle obbligazioni e dei titoli di Stato (MOT),
organised and managed by the ISE.
• The MOT is the market for trading bonds (other than
convertible bonds), sovereign debt, Eurobonds, asset-
backed securities (ABS) and other debt securities. It is
divided into two segments:
• DomesticMot (for securities settled through the Italian
settlement system).
• EuroMot (for securities settled through foreign settlement
systems).

14. Requirements for trading in the market
• Minimum size requirements
• There are no limits on the size of the issuer listed on the MOT. However,
for admission to listing, bonds must be:
• Issued against debt whose outstanding amount is at least EUR15 million
except if otherwise provided by the ISE.
• Distributed among non-professional investors and/or professional
investors, to an extent deemed adequate by the ISE to allow the market to
operate.
• Trading record and accounts
• The issuers must have published and filed, in compliance with national
law, stand-alone or consolidated annual accounts for the last two financial
years, which must be accompanied by an auditor's opinion.
• Issuers must have appointed a firm to audit the stand-alone and
consolidated annual accounts for the current year, at the date the
application for admission to listing is submitted. There are no working
capital requirements.

15. Types of Government Bonds in the Italian
Market
• BTPs - Buoni del Tesoro Poliennali
• Short term bonds
• 3, 6, and 12 month periods
• CTZs – Certificati del Tesoro Zero Coupon
• 24 month maturity
• deep discount and pay no interest
• BOTs – Buoni Ordinari del Tesoro
• maturities of 3, 5, 10, 15 and 30 years
• minimum denomination of Euro 1000
• BTP Euro i -- Index-linked BTPs
• maturity of 5, 10, 15 and 30 years
• take into account rates of inflation in the Euro-zone as measured by the
Eurostat index Harmonised Index of Consumer Prices (HICP)

16. Corporate Debt Instruments
• Plain vanilla bonds.
• Debt securities paying fixed or floating interest rates. Such securities can
be secured or unsecured, senior or subordinated, and guaranteed or not.
• Convertible bonds.
• These are debt securities that can be converted into a predetermined
amount of equity of the same issuer at certain times during their life.
• Exchangeable bonds.
• These are debt securities of an issuer that can be exchanged into a
predetermined amount of equity of a third party at certain times during
their life.
• Euro MTN.
• These are flexible medium-term debt instruments generally issued with
maturities of fewer than five years and which are offered continuously,
rather than all at once like a bond issue.

17. • Asset-backed debt securities.
• These are bonds or notes backed by a pool of assets. Typically these assets
consist of receivables other than mortgage loans, such as credit card
receivables, auto loans, manufactured-housing contracts and home-equity
loans.
• Structured bonds.
• These are debt securities originating from a combination of two or more
elements, such as a plain vanilla bond and a derivative instrument.
• Eurobonds.
• These are bonds issued in a currency other than the currency of the
country in which it is issued.
• Covered bonds.
• These are bonds issued by banks guaranteed by a cover pool of mortgage
loans or public-sector debt, segregated in an Italian securitisation vehicle.

18. Condition of the Italian Government’s Debt
• Between 2009 and 2015, the ratio of Italian public
sector debt to gross domestic product rose from 103.3
per cent to 132.6 per cent.
• The main reason for the explosion in the debt ratio has
been the fall in nominal GDP – the euro value of
economic output.
• Italy lacks the policy instruments to improve this ever
deteriorating nominal GDP.
• It has no domestic interest rate it could lower.
• It has no central bank that could monetise its debts.
• It has no exchange rate it could devalue.

19. ICELAND

20. Iceland Debt Market
• The Central Bank of Iceland administers debt affairs and debt
management with the authorisation of the Ministry of Finance.
• It does so in accordance with guidelines set by the Ministry.
• The Minister of Finance decided to assign the tasks that were
handled by the NDMA to the Central Bank of Iceland. This
changes took place on October 1st, 2007.

21. Development of the Icelandic bond market
• 1934: Kauphöllin hf. begins sales of securities to individuals and
businesses
• 1942: Landsbanki Íslands’ stock exchange begins operations, but
closes two years later
• 1964: First indexed treasury bonds issued
• 1976: Establishment of first dedicated securities house,
Fjárfestingarfélag Íslands. Others followed, including Kaupthing and
securities divisions of Idnadarbanki and Útvegsbanki
• 1979: Banking institutions authorised to index their lending and, a
year later, deposits
• 1984: Treasury bills sold by monthly auction from March to
November. Deregulation of interest rates phased in from 1984-1986
1985: Iceland Stock Exchange (ICEX) established
• 1986: Central Bank of Iceland becomes market maker for treasury
bonds

22. • 1987: Treasury bills listed on ICEX, with the Central Bank as market
maker for them
• 1989: Electronic trading system launched at ICEX. First housing
bonds issued and listed on ICEX, with Landsbréf Securities as market
maker. Establishment of the Treasury Bonds Service Centre, later
National Debt Management Agency
• 1990: Deregulation of capital movements phased in from 1990-1995
• 1992: Auctions of treasury instruments begin
• 1996: Central Bank ceases to act as market maker, except for treasury
bills
• 1999: The Icelandic Securities Depository (ISD) established
• 2000: Electronic registration of securities begins at ISD. ICEX
introduces the Saxess trading system and joins NOREX (Nordic
exchanges’ cooperation framework). End to the geographical isolation
of the Icelandic market. Primary dealers system set up, the Central
Bank ceases to act as market maker.

23. Types of Governement Bonds
• Nominal Treasury Bonds (RIKB) are coupon or zero coupon,
none-indexed securities issued by the Government Debt
Management on behalf of the Republic of Iceland. Issues of
Nominal Treasury Bonds listed on the NASDAQ OMX Iceland
hf.
Inflation-linked Treasury Bonds (RIKS) are long-term bullet
bonds or coupon bonds issued by the Government Debt
Management on behalf of the Republic of Iceland. The Bonds
are index-linked to the Icelandic Consumer Price Index.
Treasury Bills (RIKV) are zero coupon, none-indexed securities
with maturity up to one year and issued by the Government
Debt Management on behalf of the Republic of Iceland.

24. Primary Dealers for Government Securities
• Islandsbanki,
• Arion Bank,
• Landsbankinn,
• MP bank,
• Straumur Investment Bank.

25. Fixed Income Securities
• Issued by
• Icelandic Government (through the Central Bank of Iceland - Government Debt
Management) and
• the state-owned Housing Financing Fund (HFF).
The Nominal Treasury Bonds are benchmarks for non-indexed bonds,
while HFF bonds serve as indexed benchmarks.
The Government and the Housing Financing Fund have both signed
agreements with Primary Dealers regarding market
making arrangement in benchmark series. The agreements have proven
to be effective for the market, leading to increased turnover and
liquidity for the benchmark series.
Icelandic Treasury securities can be purchased from Primary Dealers.
They also provide custody services including regular statements of
holdings and portfolio movements, and the monitoring of domestic and
foreign securities i.e. dividends, bonus shares, mergers, interest
payments and redemptions etc.

26. Bond Market in Iceland
• Marketable bonds are transferable bonds offered for sale to
individuals and/or legal entities in an offering in which all the
main features of the instruments in each class are the same,
including the name of the issuer (debtor), first interest date,
repayments, interest rate and calling as appropriate.
• Treasury bonds are issued by the National Debt Management
Agency on behalf of the Treasury as a borrowing instrument in
the domestic market for its own funding. Treasury bonds are
with a longer maturity than one year either non-indexed or
indexed against a consumer price index or foreign exchange.
• Bank bonds are issued by deposit money banks. Such bonds can
be price-indexed, non-indexed or exchange rate-linked.

27. Housing Bounds
• Housing bonds are issued by the Housing Financing Fund
(previously the State Housing Authority) to
• finance its lending for the purchase or construction of housing.
• finance the social housing system.
• to finance cash loans for the purchase or construction of housing.
Housing Financing Fund comprise nearly 40% of the total market value of
bonds listed on the Iceland Stock Exchange and bonds issued by the
National Debt Management Agency are nearly 8.4%.

28. GREECE

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

30. Corporate Bonds
• The Greek economy is still struggling, but with loans hard to
find companies are taking advantage of investor demand for
high yields by issuing bonds.
• Hedge funds and private banks are seeking out bonds issued by
Greek companies, which are tapping credit markets in
increasing numbers. Among the buyers are York Capital
Management, Dromeus Capital, LNG Capital and CQS LLP.

31. Greek Bonds
• Greek bonds and bills are issued through the Public Debt
Management Agency (P.D.M.A.).
• Nowadays, after European sovereign-debt crisis, Greece is
selling only T-bills. Also there are 21 government bonds with
the maturity up to 30 years.
• The level of Central Government Debt as of 31.03.2013, is
equal to €309.3 billion. The volume of Government Bonds is
equal to €124 billion.
• 2014: A debt restructuring had just wiped out more than €100
billion ($130 billion) in government bonds. The stock market
stood at one-tenth its 2007 levels.

33. • Ever since the October 2009 when the Greek Government
finally faced up to the bond market pressures and admitted that
its predecessor has falsified the national accounts, the euro area
has been unable to shake off its sovereign debt crisis.
• the Greek debt to GDP ratio shot up from 98 percent at the start
of 2009 to 133 percent of GDP in early 2010.
• Currently, Greek debt to GDP ratio is175 percent of GDP, the
highest in the world for any country with a fixed exchange rate.

34. • "Greece has become a symbol of government indebtedness.
…It cannot grow out of trouble because of fiscal retrenchment
and its lack of export prowess. It cannot devalue, because it is in
the euro zone.”
• Greece has defaulted on its sovereign debt many times
throughout history. But the current crisis is much different
because Greece is a member of the European Union (EU), and
the debt-to-GDP ratios of Greece, Ireland, Portugal, Spain and
Italy have become serious concerns.

35. Effects of the Debt Crisis
• Greek GDP per capita declined 22.5% in real terms from the
end of 2007 through 2014, based on the latest estimates from
the IMF.
• In Greece, state revenues fell 10.6 percent between 2007 and
2014,
• Greek government expenditure was down 18.8 percent by the
end of 2014 compared to the end of 2007.
• Since 2009, however, Greece deflated its labour costs by 26
percent

36. Bailouts
• As one third of the funds disbursed in both bailout programmes
was used to retire maturing debt.
• Interest payments on debt swallowed another 1/6th of the entire
bailout.
• In total, payouts to the private sector bondholders, banks
recapitalisations and debt swaps and interest payments used up
81 percent of the total lending to Greece.

37. Possible solutions
"Europe could become a transfer union, with the north giving
more and more credit to the south and later waiving it."
• "The south can deflate."
• "The north can inflate."
• "Countries that are no longer competitive can exit Europe’s
monetary union and depreciate their new currency.
• Greece may need a third bailout deal

38. LATVIA

39. • In Latvia the fixed income market is small by international standards,
yet it has developed a versatile legislative framework and adequate
institutions. The Latvian fixed income market is formed by the
governmental bonds, mortgage bonds, and corporate bonds. In 2008
these segments took s 73 %, 16 %, and 11 %, respectively.
Government bonds strongly dominate the Latvian capital market in
the aspect of both amount and liquidity.
Development of Latvia's government bond market started in
December 1993. Since 1999, government bonds have been actively
traded at the Riga Stock Exchange. The attractiveness of Latvian
government bonds is determined by the good country rating and the
fact that the volume of the non-government bonds is not large.

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

41. Domestic Securities
• Latvian government securities are issued to ensure financing of the government
budget deficit and re-financing of the government debt, as well as liquidity of the
government finances. Currently, the government securities are the main source of
the government domestic funding.
• The issuer is the Ministry of Finance of the Republic of Latvia and the
Treasury of the Republic of Latvia performs all transactions with government
securities.
• The government securities fall into three groups according to their original term-
to-maturity:
• Short-term T-bills - securities with original term-to-maturity one year or less;
• Medium-term T-bonds - securities with initial repayment term over one year
but not exceeding five years;
• Long-term T-bonds - securities with initial repayment term longer than five
years.
• The government short-term T-bills are sold at a discount and their nominal value
is repaid on the maturity date. The government medium-term and long-term T-
bonds are sold with semi-annual or annual coupon payments and their nominal
value is repaid on the maturity date.

42. 2000-07 Debt Crisis
• The main drivers of this increase in indebtedness were Latvia’s
transition towards a market-based economy, abundant liquidity, low
interest rates—particularly on borrowing in foreign currency—and
the free flow of capital and labour following Latvia’s accession to the
EU in 2004.
• As a result, Latvia’s indebtedness reached 116 percent of its GDP in
2007 compared to under 35 percent of GDP in 2000.
• The main cause was rapid build-up of private sector indebtedness,
most of it in foreign currency, funded by foreign borrowing by
domestic banks and corporate borrowers.
• The debt service burden has declined due to lower euro interest rates
and extensive debt restructuring by banks, while a recent analysis by
Swedbank Latvia argues that the average monthly payment for a
household mortgage has declined by 20–30 percent.

43. Accession to EU
• EU membership in 2004 sparked a credit boom in Latvia, but
the global financial crisis in 2008 dried up funds overnight.
• But by late 2010, the economy was growing again. In 2012, it
expanded 5.6%, the fastest of any country in the EU, although it
has not reached pre-crisis heights. Foreign investors remain
cautious about pouring money into a country where there is a
chance of devaluation.
• Therefore, Latvia which conducts 70% of its Foreign Trade with
Eurozone Countries decided to adopt the EURO in January,
2014 which resulted in immediate improvement in the country’s
credit rating.
• Latvia issued its first saving bonds after adopting Euro as its
currency in 2014.