IFR Editor-at-large Keith Mullin
AND SO TO the home of the European Central Bank, where I had gladly accepted an invitation to moderate a couple of panel sessions at the Euro Debt Market Conference, an event organised under the auspices of Germany’s Federal debt finance agency and the Association of German Mortgage Banks. The event was part of the 14th annual Euro Finance Week, a week-long exhibition and fair.
The organisers chose a momentous time in the markets: huge volatility, uncertainty, and crashing bond and stock prices always make for an interesting backdrop for any gathering of market professionals. And it’s fitting that the event took place in Germany, which holds all of the cards for a lasting solution (although it seems no closer to wanting to play them).
I love Germany. Everyone seems loaded and everything is so reassuringly expensive in a weirdly comforting sort of way. Moody’s downgrade of 12 Landesbanken because of a reduction in implicit federal support caused a bit of a sharp intake of breath in and around the conference centre. But beyond that pre-emptive action, there was little sense of financial crisis in the halls of Congress Center Messe where the sessions took place.
The sang-froid extended to the city’s heavily booked chic restaurants and packed cocktail bars, and to the patrons I chatted with at the wonderfully retro variety show at the Tigerpalast.
My first session was a great panel on “bank funding in the new regulatory environment”, which in essence concluded that secured funding – particularly covered bonds, which are excluded from bail-in clauses and receive special treatment under Basel III – will take up a bigger proportion of banks’ overall funding mix, even though the optimal approach is for a balanced mix if it’s available.
Bearing in mind the prohibitive cost of senior unsecured debt and its more rationed supply, doing more secured is not a particularly surprising conclusion. The issue of asset ring-fencing and hypothecation and the extent to which banks can and should tie up the balance sheet in favour of secured bondholders at the expense of unsecured creditors is real, though, and will be brought to bear on how secured funding options materialise over time and at what cost.
MY SECOND SESSION was on the very current and emotive topic of the future of sovereign debt funding, with Carl Heinz Daube, managing director of Germany’s federal debt finance agency; Philippe Mills, CEO of Agence France Tresor; Thomas Olofsson, head of funding at the Swedish National Debt Office; and Robert Stheeman, CEO of the UK Debt Management Office.
The market has, of course, done everything in its power to price France out of the eurozone’s inner core
As debt market technicians, they weren’t speaking officially on behalf of their political masters; nonetheless it was a fabulous group of big-hitters from the safe end of the sovereign debt spectrum. Well, I say safe, but the market has, of course, done everything in its power to price France out of the eurozone’s inner core.
The extent to which it’s safe is a matter for debate, but Philippe Mills mounted a vigorous defence of France’s position and said what a lot of people in his position around Europe think: that the market has got it wrong and is behaving irrationally.
“I’m surprised to hear”, he said in reference to a comment made in an earlier presentation, “that we’re no longer a safe haven”. Unfortunately for Mills, no-one else seemed remotely surprised. But his point is that France has been able to raise €184bn in medium and long-term debt this year at an average weighted cost of 2.7%, close to record lows; in fact only bettered by the 2.53% of last year. According to Mills, that should qualify France as a safe haven.
WITH BUND-OAT SPREADS breaching 200bp, though, the market is perhaps trying to tell a different story. On the spreads, Mills pushed back, saying that the market was ill informed and was listening to people who weren’t decision makers.
He spoke of a self-fulfilling prophecy scenario around French government debt and of market decisions made without any reference to the fundamentals of public finances. The widening of Finland and Netherlands, for example, which have little peripheral exposure, underlines the lack of rationality. You know what? He’s got a point.
Daube also tells a great story and gives every impression of a chilled out guy without a care in the world. But I guess that’s not difficult when you’re in his position.
The German Federal government had come out a year ago with a financing requirement of €302bn but it will close the year at €275bn, thanks to the repayment by Commerzbank of its government bailout cash following its rights issue, an attractive level of tax receipts on the back of a pretty solid economic performance, and reduced government expenditure. Net result: Germany has been able to execute at record-low yields this year.
In terms of the quantum of government debt to be issued in the next financial year, numbers are being finalised, but we should expect all of the sovereigns represented on the panel to issue broadly similar amounts as the current year.
Comment of the session goes to Thomas Olofsson, who made a great play for Swedish government bonds: “Swedish debt may be expensive, but at least you’ll get your money back”. Fabulous!
