Government bond issuing could be complicated but banks supportive

Euros (photo is illustrative).
Euros (photo is illustrative). Source: Siim Lõvi/ERR

Issuing bonds with a maturity term of over a year might be complicated, according to a Swedbank spokesperson. The government is preparing to issue both short- and long-term bonds in the wake of the coronavirus pandemic. An expert from SEB says the current situation is a unique one. Spokespersons from the two banks said however they are ready to support the Estonian state in its efforts.

Finance Minister Martin Helme (EKRE) said on Wednesday that up to 12-month bonds could be issued very quickly, adding this was first planned to create a buffer for the state. 

However, long-term bonds worth between €1.8 and 1.9 billion require Riigikogu approval and need up to a month-and-a-half of pre-sale preparation to ascertain what duration they should be and whether to raise money from retail or institutional investors.

Kristjan Tamla, board chair of Scandinavian-owned Swedbank's investment funds, says issuing bonds with a maturity of longer than a year can be difficult, however, adding that over the past week as the coronavirus has spread, there have not been any major issuing of longer-term bonds across the Euro zone.

"The markets have also seen significant increases in the interest rates of so-called traditionally strong corporate and sovereign bonds. While the decline in stock markets usually results in a fall in interest rates on high-quality bonds, the opposite is the case this time," Tamla told ERR.

"For example, France's ten-year government bond, which has a higher sovereign rating than Estonia and one of the world's most liquid bond markets, has risen by one percentage point over a month - from a negative level to + 0.5%," he went on.

There have been only a few issues with maturities of up to one year. and some issues with real assets, such as home loan agreements, he went on.

Estonia currently has no problems issuing bonds with a maturity of several hundred million and up to one year, Tamla said. Investor interest in such types of bond would be greater if they were issued on terms whereby they could be secured by the European Central Bank (ECB) he went on.

"Issuing bonds with a much longer maturity and volume will be much more difficult," he said.

SEB expert: unique situation

Peeter Koppel, private banking strategist at the Scandinavian-owned SEB, said that we are facing a unique situation where the economy has stopped generating revenue in many areas, but costs and liabilities continue to accrue.

"This situation is creating a very dangerous and growing loophole. Assuming that this loophole is temporary, attempts to fill it must be considered completely rational. If the remaining confidence 'fuses' are blown by an acute crisis, one would have to look to the main protector, i.e. the state," he said.

Swedbank sent a message to state representatives on Tuesday that their pension fund representatives are ready to discuss support for a successful Estonian government bond issue, if necessary.

"It is in everyone's interest to help the Estonian economy overcome the crisis as quickly as possible and with small setbacks," Kristjan Tamla said.

Sven Kunsing, board member at SEB's asset management, said that they too are certainly ready to support the country in finding and analyzing funding opportunities. 

"We are also open to collaboration and thinking," Kunsing added.

Ministry of Finance: Work in progress

Siiri Suutre of the Ministry of Finance's communication department said not all details of the Estonian government's bond issuing can be specified at present.

"Increasing sovereign debt has been, as always, based on needs, and is constantly being updated or reassessed with regard to the requirements and economic situation of the emergency aid package," she said.

Suutre added that the financing of the state's cash flow is not the result of one or two factors, but is organized by several different methods.

"We have expanded the size of the country's short-term bond program, and this is expanding the volume of the bonds. Bonds will be issued as needed," said Suutre. 

"In addition to this, we are also raising funds from international financial institutions such as the European Investment Bank and the Nordic Investment Bank, and are preparing to issue longer-term bonds as needed."

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Editor: Andrew Whyte

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