COMPARATIVE ANALYSIS OF BOND

MARKETS IN SPAIN, PORTUGAL,

SLOVAKIA, SLOVENIA & ROMANIA
Submitted By:
Shriya Nayyar, Sonam Jambhulkar, Pranjal Mehta,
Aditya Pratap Singh & Taniya Kanwat

What is a Bond?
A bond is a loan that the bond purchaser, or bondholder, makes
to the bond issuer. Governments, corporations and
municipalities issue bonds when they need capital.
An investor who buys a government bond is lending the
government money. If an investor buys a corporate bond, the
investor is lending the corporation money.
Like a loan, a bond pays interest periodically and repays the
principal at a stated time, known as maturity.
The yield of a debt instrument is the overall rate of return
available on the investment.
Because of the inverse relationship between bond valuation and
interest rates, the bond market is often used to indicate changes
in interest rates or the shape of the yield curve.

Basics of Debt Markets:

The

debt market is a market for buying and selling of

debt securities.
It is divided into the Primary Market (for issues of bonds)
and Secondary Market (for buying and selling of bonds).
Secondary Markets can operate via exchanges or OTC
operations.
Bond market participants are similar to participants in
most financial markets and are essentially either buyers
(debt issuer) of funds or sellers (institution) of funds and
often both. Participants include- Institutional investors,
Governments, Traders and Individuals.
Bonds can be of various kinds, namely- Government
Bonds,
Corporate
Bonds,
Municipal
Bonds,
Collateralised Debt Obligations (CDOs), etc.

 Bond

Markets Volatility: When interest rates increase, the value of

existing bonds falls, since new issues pay a higher yield. Likewise, when
interest rates decrease, the value of existing bonds rises, since new issues
pay a lower yield. This is the fundamental concept of bond market
volatilitychanges in bond prices are inverse to changes in interest rates.
Fluctuating interest rates are part of a country's monetary policy and bond
market volatility is a response to expected monetary policy and economic
changes.
Credit

Risk and Credit Rating of Bonds: Every bond also carries some
risk that the issuer will default, or fail to fully repay the loan.
Independent credit rating services assess the default risk, or credit risk, of
bond issuers and publish credit ratings that not only help investors
evaluate risk but also help determine the interest rates on individual
bonds.
An issuer with a high credit rating will pay a lower interest rate than one
with a low credit rating. Again, investors who purchase bonds with low
credit ratings can potentially earn higher returns, but they must bear the
additional risk of default by the bond issuer.

Debt Market in Spain

Spanish Debt Market

Reducing Debt and Increasing Competitiveness: As specified in the

governments medium-term fiscal plan, return to a cyclicallyadjusted fiscal balance by 2017.

Sustainably boosting medium-term growth and jobs: Strengthen

active labor market policies by improving vocational training,
strengthening the capacities and efficiency of the public
employment services and enhancing coordination between the
different levels of administration.

Towards a higher performing business sector: Broaden the

corporate tax base, lower the rate and eliminate special regimes for
small medium-sized enterprises.

Overview of the Spain Debt Market

The Spanish economy returned to positive growth in the second

half of 2013 on the back of a reduction of financial tensions,
notably thanks to announcement of outright monetary transactions
by the President of the European Central bank(ECB), and the
increase in confidence that followed adoption of key reforms and
measures in Spain from 2012 onwards.

Medium-term
fiscal
sustainability
is
improving:
Sovereign spreads have fallen significantly since July 2012 to
levels not seen since since May 2010, allowing Spain to service its
debt at declining costs.

With the onset of the crisis, credit to firms began to contract

affecting all economic sectors and both large and small firms.

Seventeen EU member states registered deficits higher than the maximum

ceiling of 3 percent of GDP. The budget deficit of Greece increased to 10
percent from 9.5 percent in 2011.As a percentage of GDP, the Spanish
government debt surged to 84.2 percent in 2012 from 69.3 percent in
2011.The increase in deficit is another blow to the government that stands
firm on spending cuts even in the midst of recession and record
unemployment. The government is expected to unveil new budget plans on
Friday, emphasizing on growth.

Prime Minister Mariano Rajoy has requested the EU to relax its deficit
target for 2013 to 6 percent of gross domestic product compared to the
previous goal of 4.5 percent Helped by widespread austerity measures, the
combined budget deficit of the euro area fell to 3.7 percent of GDP from
4.2 percent in 2011. Meanwhile, government debt increased to 90.6 percent
of GDP, above the 60 percent ceiling, from 87.3 percent in the previous
year.

Recently the European Commission estimated the Eurozone deficit to

narrow to 3.5 percent of GDP in 2012 and then to fall to 2.8 percent in
2013.The EU27 budget gap also declined in 2012, to 4 percent of GDP
from 4.4 percent a year ago. The lowest government deficit in percentage
of GDP was registered by Estonia, followed by Sweden, Bulgaria and
Luxembourg. Only Germany posted a budget surplus at 0.2 percent.

Towards a more dynamic business sector in Spain

Policy

efforts to revitalize entrepreneurship and

investment in Spain are key to generating growth and
new jobs.
The government has a substantial reform program to
make it easier to do business in spain, which should in
some cases be deepend.
Boosting economic growth requires a new generation of
high-growth companies and that resources flow towards
the most productive firms.

Strategies towards more diversified financing

Bank

lending has traditionally been the predominant

financing sours in Spain.
With the crisis, larger companies have raised capital
directly from the markets, although less than in other
European countries.
Recent government initiatives(notably the strategy to
promote non-bank financial intermediation under the
Memorandum of Understanding agreed with European
authorities) attempt to fill gaps, with a special focus on
start ups.

New Developments in Spanish Market

Regulation
Recent

happenings:
Spain hit two milestones in debt-market rehabilitation on May
12, 2014, with a debut inflation-linked government bond and
the first post bailout junior bonds from lender Bankia SA.
The government raised $6.9 billion with a 10year bond, whose
returns reflect European harmonized consumer price index.
The issuance allows Spain to join a small group of euro-zone
members-Germany, France and Italy that sell inflation linked
bonds on a regular basis.
Small euro zone countries with lower funding needs are
unlikely to flow suit as the issuance of so-called linkers doesnt
normally exceeds 10% of a countrys annual government bond
issuance.

Debt Markets in Romania

General Information
Two

types of bonds municipal and

corporate bonds.
The currency of Romania is lou (lew).
It acceded to the EU in 2007 but is yet to
adopt euros as its currency.
The structure of the market 8.52 % is
owed to the bond sector, the equity
transactions accounting for 91.47 % of the
total amount.

Municipal Bond Market

The

agency that handles it on behalf of

the government is the Ministry of Public
Finance (MPF) and National Bank of
Romania (NBR).
Issuance of government bonds can be
traced back to 1994.

 This reflected a greater capacity to pay

back. However, the Bucharest Stock
Exchange has a lesser trading volume. This
has been ascribed to the late introduction of
treasury bonds in the market (seven years
after the bond sector was launched).

For

the domestic market, the Romanian

MoPF also issued securities denominated in
USD, DEM, and EUR. The issuance of
USD denominated Treasury bonds started in
1998. Since 2006 no USD denominated
issues were offered on the domestic market.
Starting with 2006, EUR became the main
currency against which Romanian leu
exchange rate is reported due to the
approaching expected accession to EU.

Corporate Bonds
Higher

rate of interest for corporate

bonds, as the risk is higher.
The first corporate bonds issued in 2003
nascent market and not very well
developed.

Debt Market in Slovenia

Overview of the Slovenian Debt Market

Slovenia became independent in 1991.

It joined the Euro Zone in 2004 & adopted the Euro in 2007. With the
adoption of the euro in 2007, the infrastructure of domestic government
debt market was further integrated to the EU market.

Ever since, bonds are "ECB eligible" and banks can use them as collateral
for borrowing at the Euro system.

Notwithstanding Slovenias efforts to bring its securities market legal

infrastructure in line with EU directives, capital markets in Slovenia are
not well developed by OECD standards.

Upon adoption of Euro in 2007, Slovenia faced a credit boom in the

construction sector, which made it plunge into double dip recession post
2008, with huge sovereign debt and non-performing loans (NPLs).

In 2012, this banking crisis seemed headed towards a bailout situation, but
was redeemed by a restructuring of the banking sector.

Since 2014, the credit ratings of Slovenia have again become stable from
negative.

Slovenian Bond Market & Types of Bonds

Slovenian companies mostly prefer bank loans as a source of funds,

because it is relatively cheap, so the bond market is largely
undeveloped. While a handful of companies draw upon fixed-income
instruments, many of the largest companies are funded directly by loans
from foreign banks, via domestic subsidiaries, foreign branches, or
directly from abroad.

Slovenias capital markets are extremely limited in both depth and

liquidity, and have a narrow, largely domestically focussed investor
base.

The following bonds are mainly issued:

1.

Government Bonds

2.

Corporate Bonds

3.

Mortgage Bonds

4.

Municipal Bonds

Bank-issued bonds & government bonds are most popular.

Corporate bond market is relatively underdeveloped.

Types of Issuers
Before

the introduction of the euro, about 80 percent of the

issues were placed with local investors.
The group of primary dealers has been internationalised since
2007. Two groups of primary dealers, one group of primary
dealers for government bonds and another group for treasury
bills exist.
The group of primary dealers for government bonds currently
consists of 9 institutions, 3 local and 6 international.
Security brokers and mutual funds are important class of
investors.
Slovenia is considering adding more international institutions
to its primary dealers group.

Government Bonds

Government securities market is traditionally one of the most efficient

segments of financial market. It is used by a variety of market
participants including for conducting monetary policy.

Government bonds are of 2 kinds:

a)

Long term bonds- Includes public offering of benchmark bonds, issued

on European or other financial markets via syndication, bond issue via
auction, a private placement of bonds, bank loans, etc.

b)

Short Term debt- 3, 6, 9 and 12-month T-bills

. In

accordance with the agreement between the Ministry of Finance and

the Ljubljana Stock Exchange (LJSE), all government bonds are listed on
Ljubljana Stock exchange.

. Only

Eurobonds and bonds issued for special restructuring and restitution

purposes are exempt from this agreement.

. The

Bond auctions are executed in two phases:

a)

1st phase by competitive bidding and

b)

2nd phase - by non-competitive bidding.

Other Bonds

Corporate bonds less preferred due to higher transactional costs.

Slovenian companies mostly prefer bank loans as a source of funds, because it

is relatively cheap. many of the largest companies are funded directly by loans
from foreign banks, via domestic subsidiaries, foreign branches, or directly
from abroad.

Corporate bonds represent roughly 5% of the total market capitalisation of

bonds and amounts to less than 1% of turnover in bonds.

In 2014, the Ljubljana Stock Exchange listed 49 bank-issued bonds, 14

corporate bonds, 1 insurance company bond and 25 government/public bonds.

Mortgage bonds and municipal bonds are bonds issued under the terms and
conditions of the Mortgage Bonds and Municipal Bonds Act and backed by
cover assets; the holders of such bonds enjoy a senior position on repayment
from such assets.

Credit Rating Agencies- In Slovenia credit rating agencies are not subject to
special regulations. Yet, the Agency of the Republic of Slovenia for Public
Legal Records and Related Services (AJPES) is an indispensable primary
source of official public and other information on business entities in Slovenia
and works like a credit rating agency.

Impact of the 2008 Financial Crisis

Slovenia experienced a dramatic boom and a continuing bust. In the run-up

to its joining the euro in 2007, the countrys economy sharply expanded,
only to burst under the weight of the financial crisis. The pre-crisis boom,
driven by easy access to external funding and excessive risk taking by banks
and businesses, has led to a protracted bust, which is compounded by
domestic structural weaknesses and the European debt crisis.

As a result, Slovenia entered a double-dip recession.

With high credits in construction sector, Slovenia faced a housing bubble.

Most affected were the banks, the largest of which are owned by the
Slovenian government. About 20% of loans on average are non-performing.

Concerns about the quality of bank assets made it harder for the Slovenian
government to fund its borrowing.

Yields on Slovenian government bondswhich reflect the governments

likelihood to repay its debts- rose.

State-owned banks had around 7 billion euros of bad loans, equal to about
20% of GDP.

Recovery from the 2008 Recession

Fears of the 7% Curse: In 2012-13, there were international fears that

Slovenia would follow Cyprus as the next Euro Zone nation seeking a
bailout. This was because like in Greece, Portugal and Ireland, it was
believed that yields would reach 7% and then, international bailout would
be sought.

However, since 2014, recovery has been made. This was fuelled by:

1. Establishment of Bad Bank- Given the absence of a specific bank

bankruptcy law in Slovenia, the Bank Asset Management Company
(BAMC), created in October 2012, brought a restructuring of the
banking system. It took over NPAs in return for government-guaranteed
bonds of up to 11% of GDP. In this way, the remaining banks could
focus on normal banking operations, while the BAMC would specialise
in the recovery of bad assets. Also done in Spain & Ireland.
2. Exports- Slovenias main stronghold is exports and despite the recession,
exports have remained strong and helped in economic recovery.
3. Recapitalisation of state owned banks

Credit Rating of Slovenian Bond Markets

As of 2014, yields and credit-default swaps on Slovenian bonds

have fallen significantly, as it became apparent that the country was
likely to avoid an international bailout, and as plans for fiscal
consolidation and banking consolidation were set out.

In 2011, Moodys downgraded the countrys long-term credit rating

to junk or sub-investment grade.

On 23 January 2015, Moodys restored its rating as investment rate.

It upgraded Slovenias rating to Baa3 from Ba1.

Similarly, S&P changed Slovenias credit rating outlook from

negative to stable. It cited the stabilization of the banking industry,
fiscal consolidation efforts and the likelihood that it will continue
the overhaul of the economy, for this upgrade.

However, while Banking Sector Restructured, corporate bonds still

overleveraged.

Debt Market in Slovakia

Slovak Debt Market

Instruments

of Debt Market:
government securities (government bonds and T-bills),
corporate bonds,
bank bonds and municipal bonds.
History

of Debt Market:
Bonds were first issued in 1990 and issuance has increased steadily ever
since. Trading volumes in the secondary market, where all deals are traded
on the Bratislava Stock Exchange, have also increased.
Until 31 December 2005, the supervision of the financial market in the
Slovak Republic was undertaken by two supervisory bodies - the Financial
Market Authority (FMA) and the National Bank of Slovakia - while the
Ministry of Finance retained regulatory powers.
In 2006 the FMA was dissolved and its powers transferred to the National
Bank of Slovakia, which cooperates with the Ministry of Finance for the
enactment of capital market regulations.
In 2014 Slovakia has adopted a new legislation to regulate its debt market.

Overview of the Slovak Debt Market

The Slovak capital market has been one of the least active. Bank
deposits are the preferred way of saving, and bank loan financing has
long been almost the exclusive source of funds for local corporaThe
Slovak capital market has been one of the least active. Bank deposits
are the preferred way of saving, and bank loan financing has long
been almost the exclusive source of funds for local corporates.
The government and banks with their mortgage-covered bonds have
been the only active issuers in the Slovak market.
The result is that market capitalization was less than 5% of Slovak
GDP in 2012, compared to almost 20% in the Czech Republic and
almost 40% in Poland.
The size of the Slovak economy is small, it is unlikely its capital
market will ever become substantive even in regional terms. But it can
provide a viable alternative to bank financing and tangible benefits for
real economic growth.

Strategy for Development of Capital

Markets
The

government adopts a mid-term strategy for the

development of the Slovak capital market.
The strategy sets out a number of specific actions to be taken
by the government at the legislative and public policy level
aimed at unlocking the potential of the Slovak capital market.
The measures include the introduction of new types of
investment instruments, as well as modernization of the
existing legal framework for bonds, investment certificates,
and derivatives.
Important changes are contemplated in the regulation of
collective investments, pension funds, and market
infrastructure, mainly by reforming the Slovak securities
registration system

Offerings of Debt Capital Market

Capital

markets tend to evolve from offerings of bonds by

government agencies or major corporates. A feasibility study of
retail government bond offerings is currently being prepared.
Traditionally, Slovak government bonds are placed through bank
syndicates or directly via auctions. The direct economic
incentives of retail offerings, which tend to be more costly than
wholesale transactions, are questionable. But there are emerging
clusters of issuers around major Slovak investment groups.
Some of them are financial conglomerates, including banks,
investment firms, and asset managers, and all are able to place
instruments issued by related corporates within their groups and
into
their
relatively
broad
client
bases.

Effect of Recession on Slovak Economy

The Slovak economy experienced a strong but short recession in
2009. The recovery afterwards was driven by exports and
investment.
While GDP growth was one of the strongest in OECD,
employment did not reach the pre-crisis level and unemployment
remains stubbornly high and rate of non performing loans went
high.
To deal with the recession the Slovakian government adopted the
method of internal devaluation with productivity increasing
measures, including capital deepening and laying off low
productivity workers.
the Slovak economy recovered as early as 2010 and returned
almost to the normal pre-boom growth rates of about 4 per
cent in 2010 and 2011.

New Bond Legislation for Slovak Market regulation

Developments

in Law:
September 1, 2014, a major amendment to Slovak bond
legislation entered into force.
The legislation introduces the concept of secured and
subordinated bonds, which existed before on "contractual"
basis with no legislative support.
Effect of Tax: Withholding tax on income from Slovak bonds
was abolished for most investors. Currently only Slovak
natural persons and non-profit organizations pay withholding
tax. Foreign investors are generally not subject to Slovak
taxation on bond income at all. This change was an enabling
factor for major Slovak issuers to enter the Eurobond market .

 In

the context of the secured bonds, Slovak law for the first
time now recognizes the concept of security agent. An
issuer's obligations can be secured by entering into a pledge
agreement with the security agent who has the right to
enforce for the benefit of all bondholders.
Slovakia is a civil law jurisdiction, of course, so these
concepts should not be confused with common law trust.
More likely, the new concepts will be interpreted by
jurisprudence and case law along the lines of traditional
concepts of agency and commission.
The new legislation also provides for statutory
infrastructure for bondholder meetings, the possibility of
changing the terms and conditions, and generally reducing
the amount of administration associated with a bond
transaction.

Recent Ventures
Slovakia

entered into foreign debt market with 12 year bond

to keep its debt load below legal limits that would force
budget cuts.
Slovakia last tapped euro markets a year ago, when it sold a
15-year, 1.5 billion-euro bond at 105 bps over mid-swaps,
expectation is that European Central Bank will loosen
policy.
Slovakia's debt is below 55 percent of GDP, well below
euro zone averages. Its economy is expected to grow 2.6
percent in 2015, up from 2.4 percent forecast for this year.
The country has benefited from recovering growth, falling
deficits and demand for yield in Europe's low-interest-rate
environment.

Debt Market in Portugal

Portuguese Financial Crisis

The

Great Recession in Portugal led to the county

being unable to repay or refinance its government debt
without the assistance of third parties. To prevent an
insolvency situation in the debt crisis Portugal applied
for bail-out programs and has drawn a cumulated
79.0 billion (as of November 2014) from the
International Monetary Fund (IMF), the European
Financial Stabilisation Mechanism (EFSM), and the
European Financial Stability Facility (EFSF).
Greece and Ireland also went into a debt crisis in 2010.
Together these debt crisis of these three countries
marked the start of the European sovereign debt crisis.

Anxiety on financial markets

After the financial crisis of 2007-08, it was known in 2008-09 that

two Porutguese banks (Banco Portuguese de Negocios (BPN) and
Banco Privadi Portusues BPP) had been accumulating losses for
years due to bad investments, embezzlements and accounting The
case of BPN was particularly serious because of its size, market
share, and the political implications - Portugal's then current
President, Cavaco Silva, and some of his political allies, maintained
personal and business relationships with the bank and its CEO, who
was eventually charged and arrested for fraud and other crimes.

In the grounds of avoiding a potentially serious financial crisis in

the Portuguese economy, the Portuguese government decided to
give them a bailout, eventually at a future loss to taxpayers.

In

the opening weeks of 2010, renewed anxiety

about the excessive levels of debt in some EU
countries and, more generally, about the health
of the Euro spread from Ireland and Greece to
Portugal, Spain, and Italy. In 2010, PIIGS and
PIGS acronyms were widely used by
international bond analysts, academics, and the
international economic press when referring to
these underperforming economies. The PIIGS or
PIGS acronym is largely responsible for the loss
of trust of investors in the country.

Austerity measures amid increased

pressure on government bonds
International

Financial Market compelled the

Portuguese Government to make radical changes
in economic policy, like other European
governments had done before. Thus, in September
2010, the Portuguese Government announced a
fresh austerity package following other Eurozone
partners, through a series of tax hikes and salary
cuts for public servants In 2009, the deficit had
been 9.4 percent, one of the highest in the
Eurozone and way above the European Unions
Stability and Growth Pact three percent limit.

 In

November 2010, risk premiums on Portuguese

Bonds hit euro lifetime highs as investors and
creditors worried that the country would fail to reign
in its budget deficit and debt. The yield on the
country's 10-year government bonds reached 7
percent a level the Portuguese Finance Minister ad
previously said would require the country to seek
financial help from international institutions. Also in
2010, the country reached a record high
unemployment rate of nearly 11%, a figure not seen
for over two decades, while the number of public
servants remained very high.

Re-access to financial markets

A positive turning point in Portugal's strive to regain access to

financial markets, was achieved on 3 October 2012, when the state
managed to convert 3.76 billion of bonds with maturity in
September 2013 (carrying a 3.10% yield) to new bonds with
maturity in October 2015 (carrying a 5.12% yield). Before the bond
exchange, the state had a total of 9.6 billion outstanding notes due
in 2013, which according to the bailout plan should be renewed by
the sale of new bonds on the market.

 As

Portugal was already able to renew one-third of the

outstanding bonds at a reasonable yield level, the market
now expect the upcoming renewals in 2013 also to be
conducted at reasonable yield levels. The bailout funding
programme will run until June 2014, but at the same time
require Portugal to regain a complete bond market access
on September 2013. The recent sale of bonds with a 3-year
maturity, was the first bond sale of the Portuguese state
since requesting the bailout in April 2011, and the first
step slowly to open up its governmental bond market
again. Recently ECB announced they will be ready also to
begin an additional support to Portugal with some yieldlowering bond purchases

When the country regain complete market access.

All together this bodes well for a further decline
of the governmental interest rates in Portugal,
which on 30 January 2012 had a peak for the
10-year rate at 17.3% (after the rating agencies
had cut the governments credit rating to "noninvestment grade" -also referred to as "junk)
and as of 24 November 2012 has been more
than halved to only 7.9%