Download Issuer Guide Government Bonds Eurozone (EU19)

Fixed Income Research
August 2015
Issuer Guide Government
Bonds Eurozone (EU19)
Please see important disclosure on the last pages.
Issuer Guide Government Bonds Eurozone (EU 19) 2015  August 2015
Introduction
2
The eurozone as part of the EU – an introduction
2
Multi-annual financial framework – the EU’s 2014 budget
5
Stability and Growth Pact – cornerstone for the coordination of national financial policies
8
Discussion about the possible removal of privileges for
government bonds
10
Objectives and structure of the study
13
Eurozone
Eurozone (EU19)
15
Lithuania extends the eurozone to 19 member states
Country Profiles
15
22
Germany
Economy is gaining a lot of momentum
22
France
A sleeping giant
27
Italy
Investment programme proposed for Mezzogiorno
32
Spain
Catalan independence movement is causing unrest
38
Netherlands
Capping natural gas production
43
Belgium
New government meets resistance to reform programme
48
Austria
Austria is pressing ahead with winding up Heta
53
Finland
Storm clouds on the horizon
58
Ireland
Star pupil achieves trend reversal
63
Greece
The eurozone's problem child
68
Portugal
Portuguese lead the field in renewable energies
73
Slovakia
Economy improving but new on the increase
78
Luxembourg
Financial sector dominates
81
Slovenia
Turnaround achieved
84
Lithuania
Closer links with the West
87
Latvia
Economy on course, in spite of Russia
90
Estonia
Exemplary budget situation and relationship with Russia
93
Cyprus
Caught in the Greek maelstrom?
96
Malta
(Energy) Connection to Italy
99
Appendix
103
Rating Overview
102
Contacts
103
NORD/LB Fixed Income Research
Introduction
The eurozone as part of the EU – an introduction
The current EU is based on
the 1952 European Coal and
Steel Community
The history of the European Union, which has consisted of 28 countries since the accession of Croatia on 1 July 2013, began on 23 July 1952 with the association of six countries in the European Coal and Steel Community (ECSC; Montanunion). It was based on
the idea by the French Foreign Minister of the time, Robert Schumann, who – in the
interests of peace – wanted to put the coal and steel production, which is so important
for the production of arms, of the two longstanding enemies Germany and France, under
the umbrella of a single authority. On 25 March 1957, the same nations (Belgium, Germany, France, Italy, Luxembourg and the Netherlands) established the European Economic Community (EEC) and the European Atomic Energy Community (Euratom). The
latter helps the peaceful use of and research into nuclear energy. The establishment of
the Common Agricultural Policy (CAP) followed in 1962 and the introduction of the European Customs Union in 1968. Denmark, the UK and Ireland (northern extension) finally
joined the EEC in 1973. The first elections for the European Parliament took place in
1979, which have been repeated every five years since then. As part of the southern
extension, Greece joined in 1981 following the reintroduction of democracy and it was
followed five years later in 1986 by Spain and Portugal, which had been subject to dictatorial regimes until the 1970s. In 1985, the EU members signed the Schengen Agreement, which was named after a small village in Luxembourg and provided for the abolition of stationary border controls between EU countries. In 1995, Austria, which could
give up its commitment to neutrality following the end of the Cold War, as well as Finland
and Sweden, became members of the European Union.
1992: Maastricht Treaty
as a basis for EMU
With effect from 1 November 1993, the association of European states was changed into
the European Union (EU) on the basis of the Maastricht Treaty (7 February 1992). The
name change was also associated with an extended objective, namely the creation of an
“area without internal borders”. The EU member states agreed to establish a single
economic and monetary union, which later led to the introduction of the euro. An extensive eastern extension followed on 1 May 2004, when Estonia, Latvia, Lithuania, Poland,
the Czech Republic, Slovakia, Hungary and Slovenia acceded to the EU, as did the two
Mediterranean islands Malta and Cyprus. Bulgaria and Romania joined on 1 January
2007 and six years later, Croatia became part of the European Union, as the second
country from the former Yugoslavia.
Current accession
candidates
Turkey has been a candidate for potential EU accession since 2005, although negotiations have been proceeding rather sluggishly especially since the latest anti-democratic
tendencies under Erdogan and the continuing failure to fulfil the constitutional criteria for
inclusion. Iceland applied for EU membership in July 2009 but cancelled its application in
March 2015. Albania, Serbia and Macedonia have also been awarded candidate status.
European Economic and
Monetary Union (EMU)
The introduction of a single currency for European Union member states went through a
three-stage process: in the first stage, the priority was the completion of the European
internal market. Economic and financial policy as well as monetary and exchange policy
were also to be coordinated with the aim of achieving financial stability. In the second
stage (1 January 1994 to 31 December 1998), the European Monetary Institute (EMI)
was first established and operated as a predecessor to the European Central Bank,
which was installed in Frankfurt on 1 June 1998. Once the third stage started, monetary
policy was transferred to the European System of Central Banks (ESCB), which comprised all the member states’ central banks in addition to the ECB.
Lithuania became the
nineteenth Eurozone
member on 1 January 2015
The euro was initially introduced as bank money on 1 January 1999. The founding nations of the eurozone included Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Spain. At the end of 2002, the single
currency also replaced national cash. The EU 18 was created through the accessions of
Greece (2001), Slovenia (2007), Malta and Cyprus (2008), Slovakia (2009), Estonia
(2011) and Latvia (2014). As the last Baltic country, Lithuania became the nineteenth
member on 1 January 2015. The countries of the eurozone differ considerably in terms
of their economic performance. Accordingly, virtually half the total gross domestic product is generated in France and Germany (see chart below). A single currency area is not
only politically and economically significant. One of the world’s largest bond markets
(EUR 8,500bn) was produced as a result of countries relinquishing their national currencies.
Eurozone (19 countries) – share of gross domestic product (2014)
Netherlands
6.6%
Spain
10.5%
Belgium
4.0% Austria
3.3%
Finland
2.0%
Ireland
1.8%
Italy
16.0%
Greece
1.8%
Portugal
1.7%
France
21.1%
Germany
28.7%
Others
2,6%
Lithuania
0.4%
Latvia
0.2%
Estonia
0.2%
Cyprus
0.2%
Slovenia
0.4%
Malta
0,1%
Luxembourg
0.5%
Slovakia
0,7%
Source: Eurostat, NORD/LB Fixed Income Research
Ireland has turned the corner
While Ireland, which was heavily implicated in the financial crisis, had to be bailed out
under the programme established to rescue European banks and was consequently one
of the programme countries under the supervision of the Troika, it has now turned the
corner. Last year, it posted economic growth of 4.8% and, in this respect, was only exceeded by Luxembourg (5.5%) within the eurozone. However, the burdens resulting
from the measures to rescue the country’s banks are making themselves felt in the Irish
budget, which is creaking under a heavy debt burden, meaning that Ireland cannot fulfil
either of the two Maastricht criteria. The same is true of Spain, which has been in recession since 2009 and posted positive economic growth of 1.4% for the first time last year.
However, in spite of positive developments on the employment market, the country has
so far not been able to rid itself of its high unemployment rate, which still stands at
23.9%. The measures to rescue the banks have not left the budget unscathed either; its
debt has virtually doubled since then and has now reached almost the level of gross
domestic product (97.7%). However, Spain and Ireland are not alone here, since with
few exceptions, the sovereign debt of EU member countries has expanded to over 60%
of GDP. Greece is by far the worst offender (177.1%), but Italy’s (132.1%) and Portugal’s (130.2%) debts have also increased to alarming heights. Italy can still claim that
large amounts of its own sovereign bonds are held by domestic creditors. In addition to
the countries mentioned, the debt ratio in Belgium and Cyprus has exceeded 100% and
France is also coming perilously close to this threshold.
Baltic states are model pupils In addition to Luxembourg, the Baltic states are model pupils in matters of financial proin terms of sound public
bity, as they all fulfil both Maastricht criteria. This fact is also due to the efforts made to
financial management
fulfil the criteria for accession to the eurozone, which were ultimately successful. This is
even more remarkable given that the three Baltic countries suffered particularly severely
from the consequences of the financial crisis; GDP fell by over 14% in each case, and by
as much as 17.7% in Latvia. The solid budget situation in the Baltics was therefore accompanied by painful cuts to social services, in particular, and to education. This was an
event, which led to considerable resistance among the population to the rescue packages being extended; ultimately per capita GDP in the Baltics is approximately one third
below that of Greece, which is why there is limited enthusiasm for assuming responsibility for the debts of a more prosperous country. Deflation is another risk that was virulent
throughout the entire eurozone but it has been averted through the ECB’s bond purchase programme among other measures.
ECB Executive Board
member demands a Ministry
of Finance for Europe
To be able to coordinate economic and financial policy within the eurozone more effectively, the ECB Executive Board member Benoît Coeuré argued in favour of the creation
of a Ministry of Finance for Europe at a conference attended by German ambassadors in
August 2015. Even if he himself has not stated it, ECB President Mario Draghi also
seems to be an advocate of this demand. The idea behind the creation of such an institution would be a continuation of the European Semester, which involves preventive
measures in the event of an imminent breach of the Maastricht criteria. The financial
policy of the individual member states is also to be coordinated more effectively. Even
the staff in the Federal Ministry of Finance seem open to the idea and are working on a
concept which envisages a separate budget for the new ministry to be created. However, an amendment to the constitution would be required for the establishment of a Ministry of Finance under the supervision of the European Parliament; depending on the
structure involved, this would involve far-reaching transfers of national sovereignty. This
would then be a further step in the direction of a federal Europe. Even if EU member
states have so far shown little interest in such transfers of powers, a European Ministry
of Finance is no longer purely a utopian idea. In particular, the French, for instance, are
far more open to a paradigm shift of this kind after their experiences in the Greek crisis,
when the French vote had little weight.
EU19 key figures (2014)
GDP
(EURbn)
GDP growth
(%)
Populationsize (m)
National
debt
(% of GDP)
Budget
balance
(% of GDP)
HICP
inflation
(%)
Unemployment rate
(%)
Eurozone
10,103.5
1.3
337.4
91.9
-2.4
-0.2
11.2
Germany
2,903.8
1.6
80.8
74.7
0.7
0.1
4.8
France
2,132.4
0.2
65.8
95.0
-4.0
0.1
10.3
Italy
1,616.3
-0.4
60.8
132.1
-3.0
-0.1
12.6
Spain
1,058.5
1.4
46.5
97.7
-5.8
-1.1
23.9
Netherlands
662.8
1.0
16.8
68.8
-2.3
-0.1
7.0
Belgium
402.0
1.1
11.2
106.5
-3.2
-0.4
8.7
Austria
329.3
0.4
8.5
84.5
-2.4
0.8
5.6
Finland
205.2
-0.4
5.5
59.3
-3.2
0.6
9.3
Ireland
185.4
4.8
4.6
109.7
-4.1
-0.3
9.8
Greece
179.1
0.8
10.9
177.1
-3.5
-2.5
25.9
Portugal
173.0
0.9
10.4
130.2
-4.5
-0.3
13.2
Slovakia
75.2
2.4
5.4
53.6
-2.9
-0.1
12.0
Luxembourg
49.4
5.6
0.5
23.6
0.6
-0.9
5.8
Slovenia
37.2
2.6
2.1
80.9
-4.9
-0.1
9.3
Lithuania
36.3
3.9
2.9
40.9
-0.7
-0.1
9.0
Latvia
24.1
2.4
2.0
40.0
-1.4
0.3
9.9
Estonia
19.5
2.1
1.3
10.6
0.6
0.1
6.2
Cyprus
17.5
-2.3
0.9
107.5
-8.8
-1
16.3
Malta
7.9
3.5
0.4
68.0
-2.1
0.4
5.7
Countries
Source: Eurostat, NORD/LB Fixed Income Research;
Anmerkung: Bei Verletzung der Maastricht-Schwellenwerte ist das entsprechende Feld rot unterlegt
Introduction
Multi-annual financial framework – the EU’s 2014 budget
EU budget reduced for the
first time
With the 2014 financial year, the new cycle of the multi-annual EU financial framework
started for the period 2014-2020. Starting on the basis of a proposal by the European
Commission, the EU Council, i.e. the various member states, and subsequently the EU
Parliament must approve the budget. In the budget, upper limits are specified for the
different budget items. This ensures that spending does not exceed revenue. According
to figures from the German Ministry of Finance, the overall budget for the period from
2014 to 2020 comprises payment obligations of EUR 960bn, which represents approx.
1.0% of GNI in the EU in relation to expected economic growth. In view of the difficult
budget situation in some member states, the EU agreed in 2014 to cut the budget compared with the previous year for the first time in its history (by around -6%). The budget
plan includes funds for payments of EUR 135.5bn, which are divided between the following six items:
1a. Research and technology
(competitiveness for growth and employment)
1b. Structural policy
(economic, social and territorial cohesion)
2. Agricultural policy
(sustainable growth, natural resources)
3. Home affairs
(security and EU citizenship)
4. Foreign policy
(Europe as global player)
5. Administration
Agricultural policy is the
biggest item in the budget
At EUR 56.5bn, the highest amount in the 2014 budget plan is once again specified for
agricultural policy. It represents a 41.7% share of the overall budget. The second largest
item is the fund for regional structural measures, which amounts to EUR 50.95bn. Next,
but with a substantial gap, is the fund for research and technology at a volume of EUR
11.4bn (8.4%). For administration, EUR 8.40bn are planned and foreign affairs are estimated to result in expenses of a maximum of EUR 6.19bn. The budget item for home
affairs, which encompasses monitoring borders and the management of migration, is
stated as EUR 1.68bn. The remainder of the budget is earmarked for settlements and
the category of other.
Current multi-annual financial In the comparison of the multiannual financial framework for the current period (2014 to
framework focuses more on
2020) with the previous period, a new focus on research and development as well as the
the future
gradual reduction of agricultural subsidies is evident. Spending on research is to increase by 37.3% compared with the period from 2007 to 2013 whereas the fund for
agricultural subsidies is to be reduced by 11.3%. The fund for cohesion faces a cut of
8.4%. Conversely, measures to protect borders will receive 26.8% more in funds.
In 2014, revenue amounted to Income mainly consists (73.6%) of payments from member states, the amount of which
approx. EUR 100bn
depends on the amount of each country’s GDP. No fixed amount is specified for this
particular budget item. Payments from member states are based on the difference between expenses and other income, which ensures that income and expenses are always
balanced. For the 2014 financial year, an amount of approxinately EUR 100bn is anticipated, which is divided among the member states according to each country’s GDP. The
second highest source of income is VAT (EUR 17.8bn), followed by traditional own resources such as import tax and the sugar levy in respect of which an inflow totalling
EUR 16.3bn is expected in 2014.
Germany is the biggest net
payer
Germany’s role as the driving force in Europe is based on the country having the highest
population as well as the fact that it is by far the biggest net payer within the European
Union. Germany’s net position on the assets side covers roughly a third of the combined
amount which net receivers receive in terms of inflows. A further supporting country,
although with a considerable gap, is France. Despite having approximately the same
population as the UK and Italy, France shoulders a significantly greater burden. The
financial burden in relation to GDP is even more substantial for the Netherlands, as
illustrated by the chart below. Another curious fact is that Luxembourg, the country with
the highest per capita income in the EU, is listed as a net receiver in the statistics. There
are several reasons for this apparent contradiction: the high GDP per capita in the
smallest of the Benelux countries does not represent the actual per capita income of
Luxembourg residents, because a significant portion of GDP is generated by working
commuters who are resident in Germany and France. This phenomenon is also found in
a similar form in Bremen, which is one of Germany’s economic regions with the highest
GDP per capita. However, actual tax revenue is considerably lower because of the high
number of commuters. Nevertheless, Luxembourg is one of the wealthiest EU member
states. The reason why Luxembourg is a net receiver is that some of the EU’s institutions are located in the Grand Duchy of Luxembourg. Measured in relation to the country’s total economic output, they make a material contribution.
2014 EU budget: net receiver vs net payer
(in EURm)
Source: Eurostat; NORD/LB Fixed Income Research
2014 EU budget: net receiver vs net payer
(in % of GDP)
Source: Eurostat; NORD/LB Fixed Income Research
Net receiver vs net payer
In very simplified terms, the division of net receivers and net payers in the EU reflects
Europe’s recent history. In addition to the crisis-stricken countries of Portugal, Ireland,
Spain and Greece as well as the two islands of Cyprus and Malta, receiver countries
exclusively include former eastern bloc countries which are still in the phase of catching
up economically since the fall of the wall. Among the net payers are the founding countries of the European Community and the affluent countries in northern Europe as well
as Austria, which committed to being neutral after the Second World War and therefore
only joined the European Union at a later date. Among the net receivers, Poland’s situation is conspicuous. The country receives by far the highest amount of funds from Brussels. This is due to the fact that among the net receivers Poland is the country with the
highest population (38.0m) and unlike Romania, the country’s administrative structure for
absorbing EU funds is more efficient. Along with Romania, Bulgaria is one of the member states which has not succeeded in drawing the funds assigned to it in full, because
they do not have sufficient investment projects and/or the relevant country’s own contribution as required by Brussels exceeds the countries’ own financial resources.
Appearances are deceiving
Although Germany makes by far the biggest contribution to the EU’s budget in terms of
absolute figures, the analysis in relation to GDP reveals a different picture. In this respect, the Netherlands shoulder the biggest burden on balance. Sweden is on a par with
Germany. Bulgaria and Lithuania bring up the rear. Bulgaria has the lowest per capita
income in the EU (with Croatia in a better position). At the same time, Lithuania is on a
par with Portugal, Slovakia and its Baltic neighbours based on this welfare indicator.
Introduction
Stability and Growth Pact – cornerstone for the coordination
of national financial policies
Stability and growth pact as
an instrument to limit public
debt
Agreed in 1999 and modified in 2011, the Stability and Growth Pact is designed to ensure fiscal stability in the member states. The SGP requires the national governments of
the member states to avoid excessive public deficits. To achieve this goal, the Pact is on
the one hand aimed at preventing budgetary deficits to ensure “sustainable public finances” (preventative component) and, on the other, at swiftly reducing an existing excessive deficit (corrective component). To monitor the fiscal situations of the individual
Member States a stability programme must be submitted to the European Commission
and the Council of European Union Finance Ministers (Ecofin Council) by the end of
April each year – also by candidates for accession to the Economic and Monetary Union
(EMU). It includes, for example, medium-term projections of general government revenue and expenditure, net lending/net borrowing and/or structural net lending/net borrowing, the balance net of cyclical effects and adjusted for non-recurring effects as well as
the level of indebtedness.
Introduction of the
‘European Semester’
As a result of the bank rescue measures in the context of the financial crisis, since 2009
public debt significantly increased in several countries in the euro zone. One year later,
on 17 June 2010, the "European Semester for economic policy coordination" was implemented by the EU. It is a complement to the Stability and Growth Pact, which operates under the name "Sixpack" and was introduced as part of the EU 2020 strategy to
increase economic growth and employment. The European Semester is based on the
idea that sound financial management has not only nation-state importance, but radiates
to the other Member States of the euro zone. With the help of this instrument macroeconomic imbalances should be identified early and countermeasures are to be initiated.
The Stability and Growth
Pact includes sanctioning
mechanisms
At the level of the preventative component, the Stability and Growth Pact stipulates that
the budget of a Member State must, from a cyclically-adjusted or structural perspective,
be closed with a surplus or a deficit, provided it does not exceed the threshold of 0.5% of
GDP. Since the SGP was revised in 2011 the applicable legislation has provided the
option of imposing sanctions on eurozone countries that have failed to take any effective
measures at the recommendation of the Ecofin Council or the Commission to prevent an
infringement in the form of an interest-bearing deposit that has to be lodged with the EU
(0.2% of the previous year’s GDP). The level of the corrective component comprises a
deficit procedure as a core element. The Ecofin Council can introduce this after the
national budgetary policy has been examined by the European Commission, provided it
has been ascertained that a Member State has new borrowing of more than 3% of the
respective GDP or a “non-temporary and insufficiently declining level of indebtedness” of
more than 60% of the respective GDP. This means that at least the fiscal convergence
criteria of the Treaty on European Union (EU Treaty, “Maastricht Treaty”) continue to
apply to states after they have introduced the euro as their official national currency. The
sanctioning instrument which the deficit procedure confers on the Ecofin Council firstly
comprises an extended obligation by the Member State concerned to report on the efforts made and the measures taken to reduce the deficit. If it is determined that the
measures taken are inadequate and the excessive deficit will continue, options are
available at other levels of authority to impose fines as well as the establishment of a
monitoring commission consisting of the EU Commission and the ECB.
National debt brakes and a
macroeconomic imbalance
procedure are other
instruments for coordinating
financial and economic
policy
In the wake of the euro crisis all EU Member States, with the exception of the United
Kingdom and the Czech Republic, gave an undertaking in 2012 within the framework of
the so-called Fiscal Pact to implement a requirement to achieve a budgetary position
close to balance and an automatic correction mechanism in their respective national law
in case of non-compliance. The definition is based on the preventative component of the
Stability and Growth Pact, which states that the structural and cyclically-adjusted deficit
should not exceed 0.5% of GDP. To limit domestic and international trading imbalances
as a source of risk for macroeconomic development, a scoreboard made up of ten indicators was introduced, which is compiled and published each year by the EU Commission. As in the procedure for fiscal policy breaches, there is also an option, if the thresholds are exceeded, of instituting proceedings against a Member State, in the course of
which recommendations and obligations for remedying imbalances – including financial
sanctions if no action is taken – can be imposed on the Member State concerned.
The European Stability
Mechanism as lender for
states in danger of defaulting
The ESM was founded in 2012 as an EU financial institution aimed at guaranteeing
financial support for states to avert their impending insolvency and resultant negative
effects for financial stability in the eurozone. In the event that a Member State requests
financial support, the ESM grants support, after a thorough examination - on the recommendation of the EU Commission in consultation with the European Central Bank and,
in some cases, the International Monetary Fund - in the form of precautionary financial
aid, loans and bank recapitalisation aid. Particular attention is paid in the examination
decisions to the relevance of the request for the financial stability of the euro area, the
sustainability of the sovereign debt of the ESM member and the amount of the actual
funding needed. In return for the granted financial support, the affected Member State
agrees a macroeconomic adjustment programme with the EU Commission the European Central Bank and the International Monetary Fund that can provide for more wideranging fiscal and economic policy measures. Compliance with this programme is regularly monitored by the three institutions over the course of time.
Introduction
Discussion about the possible removal of privileges for
government bonds
Greece highlights the
dilemma resulting from a
close link between states
and banks
The crisis in Greece, which developed as a result of the high level of national debt combined with a fragile banking system, has brought the traditional close link between states
and banks back onto the political agenda. In many industrialised western nations, certain
banks faced financial distress following the financial market crisis and had to be rescued
from bankruptcy by means of government aid because they were too big to fail. Consequently, the debt level of countries increased significantly. Some eurozone countries
ended up in such difficulties that the creditworthiness of these countries started to be
doubted. This negative nexus between states and banks led the European Systemic
Risk Board (ESRB) to convene an expert commission whose task it was to deal with this
issue. As part of this, a discussion developed as to the regulatory adjustments which
may be made. In the following, the various elements under discussion as well as the
pros and cons of possible regulatory amendments are to be presented.
Review – three key privileges
One of the main reasons for the close link between states and banks is based on the
privileged treatment of sovereign debt. In the regulation of European banks, this is manifested in the fact that euro-denominated claims on countries within the eurozone do not
need to be backed by capital. This regulation also takes effect for claims on sub-national
authorities and central banks. A similar arrangement applies to claims vis-à-vis third
countries and their central banks if basic rules are in place which are at least equal to
those of the eurozone. In its statement of October 2014, the Advisory Council of the
Federal Ministry of Finance in Germany pointed out that the European Central Bank
gives preferential treatment to government bonds as part of its open market policy. This
open market policy is of overriding importance in the transmission mechanism of the
ECB’s monetary policy. Although a discount is also deducted from this type of security, it
is lower than that applied to claims vis-à-vis debtors where the risk potential is comparable. In this context, it should be mentioned that a higher discount is applied to government bonds of reduced asset quality compared with securities from issuers with an excellent credit rating. In addition, government debt is exempt from the upper large exposure limit, which is a statutory limit applicable to claims on private borrowers and aimed
at avoiding cluster risks. Banks can accumulate claims on a single government borrower
without restriction. In accordance with Articles 387ff. of the Capital Requirements Regulation, large exposures are a financial institution’s claims on a customer or affiliated third
parties of that customer which exceed the threshold of 10% of the eligible capital. The
third regulatory assumption is that the liquidity of government bonds is unrestricted. It
was proved wrong by the financial market and sovereign debt crisis. In particular, creditors who hold Greek government securities have found out that these debt instruments
are not tradable at all times and cannot therefore always be readily converted into cash.
Crowding-out
In view of the fact that banks do not need to hold capital for government bonds, they
have an increased incentive to include such bonds in their own portfolios. As a result of
this mechanism, government bonds from issuers with low creditworthiness are treated
equally to debt instruments from countries which are considered to be a safe anchor. At
the same time, other types of investment are not treated the same. Banks need to hold
considerably more capital for claims on private borrowers than for bonds from countries
with comparable risk features. In this context, what economists call crowding out is a
relevant issue. It assumes that the regulatory preferential treatment of government
bonds squeezes out lending to private investors and therefore weakens the capital
stock, which further increases the negative welfare effects for the relevant country. The
amount of capital banks must hold for claims against private creditors is based on the
risk inherent in the debt instrument, whereas it may be waived for government bonds.
However, supporters of the regulatory zero weighting counter that in an open national
economy, which is the case for the relevant eurozone countries, increased demand for
capital in one country can be compensated by lending from abroad.
Expansion of national debt
President of the German Bundesbank Jens Weidmann has spoken out in favour of
gradually removing privileges for government bonds. He has pointed out the effect of the
current regulation on the financial stability of national budgets. The preferential treatment
of government bonds results in the distortion of prices, which reduce the yield for issuers
and therefore the cost. This effect increases with weaker creditworthiness and a lower
debt ratio in national finances. Privileges for government bonds represent a significant
incentive for increasing the debt level of public sector budgets because countries and
authorities find a grateful taker for their debt instruments in view of banking regulations.
Consequently, politicians lack the tools to take the corrective action which would limit the
expansion of national debt. Giving preferential treatment to sovereign debt weakens
natural budget restrictions and accordingly results in a latent increase in national debt.
The same applies to the indebtedness of subordinated local and regional authorities
which end up pursuing a more careless budgetary policy on the basis of the general
conditions. If reforms of the regulations will stipulate that banks must hold risk-weighted
capital for claims on public sector borrowers, this may perceptibly reduce the willingness
of financial institutions to buy government bonds from crisis-stricken countries. Countries
with a high level of national debt will have little interest in a change to current framework
conditions. In relation to the results of the last bank stress test, the removal of preferential treatment for public sector debt would lead to more extensive capital requirements.
Whether this is more likely to result in capital increases at banks or in a flight into bonds
from safe haven countries is difficult to predict. Spanish and Italian banks, in particular,
would be affected by reforms of this regulation. However, it should be noted in this context that banks already provide capital for balance sheet items which report claims on
countries with a weak rating. In reality, a zero weighting does therefore not actually exist.
Negative knock-on effects
on banks
In its annual review, the Council of Experts for the Assessment of Macroeconomic Developments highlighted the importance of stable public finances and their external effects on financial institutions. Banks in crisis-stricken countries with a high level of national debt have great difficulty obtaining funding in the capital market. Ultimately, investors already price in potential losses on default and therefore demand a premium in
terms of the return on equity. A weak country rating may be associated with spill-over
effects related to the rating of private debtors, which additionally increase the susceptibility of the relevant financial institutions to risks. An intuitive understanding suggests
that the more claims on a country are included in a bank’s portfolio the greater is this
effect. An IMF study indicated that government funding via banks is far more extensively
used in the eurozone than in the USA, measured in terms of GDP.
Restructuring is made more
difficult
In its annual report for 2014, the Bundesbank also drew attention to the impact on the
financial market stability as a whole. Banks in crisis-stricken countries have a particular
incentive to expand their portfolio by including risky government bonds from their home
country, because they do not need to hold the relevant capital in view of the existing
privileges. They may utilise carry trades, i.e. take the arbitrage profit resulting from the
higher interest rate on securities from the crisis-stricken country and lower cost of funding at the domestic central bank. In view of the nexus between states and banks, the
restructuring of government debt is made more difficult. The case of Greece is a typical
example of this situation. Both the Greek government and some of the lenders have
requested a partial haircut to restore Greece’s debt-carrying capacity, which in view of
the debt level of 177.1% of GDP may be dubious. If, based on this, creditors are forced
to waive a part of their claims, the next set of problems is a foregone conclusion. The
first haircut implemented in respect of Greece already had a severe, negative impact on
Greek banks. A further haircut applied to Greek government bonds would only worsen
the instability of the Greek financial sector. To counter this problem to some extent, the
introduction of an upper large exposure limit for public sector debt securities has been
discussed, similar to that which has been common practice for claims on private borrowers for a long time. This regulation is aimed at preventing the failure of a single debtor to
make payment from getting the whole bank into trouble. This is all the more important
because the home bias is marked in respect of government bonds. Financial institutions
primarily include debt instruments from their respective country of origin in their portfolios, which additionally reinforces the negative correlation between states and banks.
National debt (in % of GDP)
Schwächen
& Risiken
1
Japan
246.1%
2
Greece
177.1%
3
Italy
133.8%
4
Jamaica
132.8%
5
Lebanon
131.8%
6
Eritrea
129.2%
7
Portugal
126.4%
8
Cape Verde
121.1%
9
Bhutan
115.9%
10
Ireland
107.8%
11
Grenada
107.1%
12
Antigua and Barbuda
106.9%
13
Belgium
106.6%
14
Cyprus
105.7%
15
USA
105.1%
16
Barbados
102.5%
17
Gambia
100.0%
18
Spain
99.4%
19
Singapore
97.8%
20
France
97.0%
Grey shading: eurozone members
Source: Statista; NORD/LB Fixed Income Research
Outlook
To date, the discussion about a possible removal of privileges for government debt has
been mainly academic. Andreas Dombret, the Executive Board member of the Bundesbank responsible for banking and financial supervision, does not expect actual implementation until 2018. It remains to be seen whether the existing rules on exceptions will
ever be changed, because governments will not initially want to waive their financing
benefit. Bundesbank President Weidmann is nevertheless optimistic that regulatory
conditions will be changed, since he has also found support from the Bank for International Settlements in this respect. At a conference early this year, he indicated that he
was in favour of Europe going it alone if no global agreement is reached. In this context,
it is worth noting that national debt measured in relation to gross domestic product is a
particularly serious issue in Europe (see chart). The reforms implemented as part of
Basel III with effect from 1 January 2014 to increase capital requirements in connection
with adequate risk provisions still provide for the option of zero-weighting government
bonds for regulatory purposes within the eurozone. Although further developments in
terms of possible regulatory adjustments are not foreseeable, the present article should
provide food for thought and raise awareness of the topic.
Introduction
Objectives and structure of the study
Analyst:
Norman Rudschuck
Fixed Income Research
This study aims to provide concise up-to-date information for investors intending to invest in government bonds issued in the Eurozone (EU19). Besides a general analysis of
the market, individual profiles of all the countries are provided. The study focusses on
EUR bonds from the issuers (including FRN, inflation-linked bonds), with a distinction
made in accordance with the respective national classification. In all our research, we
rely primarily on official documents published by the EU Commission, the relevant
states, finance ministries, financial agencies, treasuries and statistical authorities (especially Eurostat). We also obtain valuable contributions from gtai (Germany Trade & Invest) and UN Comtrade. All data is based on research using the Eurostat database and
the Bloomberg financial information system. Underlined terms have web links to the
relevant original sources. We would like to point out that these pages are outside the
sphere of responsibility of NORD/LB. For this reason it is not possible to accept any
responsibility for the content.
+49 (511) 361-6627
norman.rudschuck
@nordlb.de
Regional classification of EU
regions based on NUTS
(Nomenclature des unités
territoriales statistiques)
We make use of the NUTS system (Nomenclature des unités territoriales statistiques) as
a standardised basis for classifying economic regions. It was introduced at the start of
2008. NUTS breaks the EU down into three different regional levels based on number of
inhabitants: The NUTS 1 level (3 to 7 million inhabitants) comprises 98 regions, while the
NUTS 2 level has 276 regions (800,000 to 3 million inhabitants). The NUTS 3 level has
1,342 units (150,000 to 800,000 inhabitants). Above these three regional levels there is
also the NUTS 0 level, corresponding to the national states. The regional GDP shares
mentioned in this study are based on data from the year 2013.
NACE (Nomenclature
statistique des activités
économiques dans la
Communauté européenne)
Eurostat provides information on the respective shares of individual economic areas in
the gross value added of economies. They are rendered comparable through the use of
NACE codes (Nomenclature statistique des activités économiques dans la Communauté
européenne), which are available in different degrees of granularity. Within the scope of
this work, we shall restrict ourselves to making a distinction between ten sectors [nama_nace10_c]. In the English Version the ten branches are defined as: A – Agriculture,
forestry and fishing, B-E – Industry (except construction) F – Construction; G-I – Wholesale and retail trade, transport, accommodation and food service activities J – Information and communication K – Financial and Insurance Activities L – Real Estate Activities M-N – Professional, scientific and technical activities; administrative and support
service activities O-Q – Public administration, defence, education, human health and
social work activities R-U – Other service providers (Arts, entertainment and recreation;
other service activities; activities of household and extra-territorial organizations and
bodies).
SITC (Standard International
Trade Classification, Rev. 4)
In addition, the country profiles presented in this study have a detailed ranking of foreign
trade goods and preferred trading partners. In this case too, in order to achieve comparability of the categories that are applied very differently in national statistics, we use
SITC (Standard International Trade Classification, Rev. 4) for each country. SITC is a
systematic classification of items in international foreign trade, which Eurostat uniformly
provides for the EU members. In the English version, the nine sections are designated
as follows: 0 – Food and live animals, 1 – Beverages and tobacco, 2 – Crude materials,
inedible, except fuels, 3 – Mineral fuels, lubricants and related materials, 4 – Animal and
vegetable oils, fats and waxes, 5 – Chemicals and related products, n.e.s., [not elsewhere specified], 6 – Manufactured goods classified chiefly by material, 7 – Machinery
and transport equipment, 8 – Miscellaneous manufactured articles, 9 – Commodities and
transactions not classified elsewhere in the SITC. Systematically, we follow UN
Comtrade’s aggregation of certain sectors: sections 0 and 1 are aggregated into 0+1.
Furthermore, sections 2 and 4 are aggregated into 2+4.
Basis of analysis
In order to ensure that terms and content are used systematically and that data can be
compared, we follow the European System of Accounts (ESA 1995), based on the
worldwide System of National Accounts (SNA 1993) created two years earlier. In the
context of the present analysis, the revenue and expenditure of the EU19 states are also
of key significance. The basis for this is the European System of Accounts (ESA 1995),
in particular the listing of distribution transactions (D).
Total Revenue; TR
Current taxes on income, wealth, etc. (D.5) cover all compulsory, unrequited payments,
in cash or in kind, levied periodically by general government on the income and wealth of
institutional units. Taxes on income (D.51) relate to taxes on incomes, profits and capital
gains as well as on holdings of property, land or real estate. Other current taxes (D.59)
include current taxes on capital, poll taxes, expenditure taxes, payments relating to the
use of transport and taxes on international transactions (except import duties). Taxes on
production and imports (D.2) consist of compulsory, unrequited payments levied in respect of the production and importation of goods and services. These include taxes on
products (D.21), value added type taxes (D.211), taxes and duties on imports excluding
VAT (D.212), taxes on products, except VAT and import taxes (D.214) as well as other
taxes on production (D.29). Property income (D.4) contains interest on deposits, loans
and accounts receivable and payable. Employees' social contributions (D.6112) are
social contributions payable by employees to social security, private funded and unfunded schemes.
Total Expenditure; TE
Compensation of employees (D.1) comprises the total remuneration, in cash or in kind,
payable by an employer to an employee in return for work done by the latter (gross
wages and salaries and social contributions). Social benefits (D.62) comprise all social
benefits except social transfers. Social transfers in kind (D.63) consist of goods and
services, provided as transfers in kind to individual households by government units and
NPISHs. Interest, payable (D.41) in particular comprises current coupon payments for
government bonds. Capital transfers, payable (D.9) include government expenditure to
support the national banking sector, which results in a change in the financial or nonfinancial assets shown in the balance sheet of at least one of the parties to the transaction.
Eurozone (EU19)
Lithuania extends the eurozone to 19 member states
NUTS 0 regions of the
eurozone are equivalent to
nation states:
With a GDP of EUR 10,103.5bn, the eurozone is the world’s second largest currency
area behind the USA, closely followed by China. In terms of population, the eurozone, at
337.4m, exceeds the United States but only ranks third behind India and China. The
euro was introduced as a book currency with eleven accession countries on 1 January
1999 in accordance with article 136 et seq. of the Treaty on the Functioning of the European Union. The euro has also been the official means of payment in cash transactions
since 1 January 2002. Lithuania acceded to the eurozone at the beginning of this year,
meaning that it has now expanded to 19 member countries (see chart below). The potential candidates for future accession to the eurozone include the Eastern and Southeastern European countries Bulgaria, Croatia, Poland, Romania, the Czech Republic
and Hungary. However, this is dependent on fulfilment of the accession criteria and the
majority of the candidates are still a long way from achieving this. The situation is different in Poland, where the economy is sufficiently strong to make accession seem realistic
in the near future. However, discussions there on this topic have been adversely affected by the crisis in Greece and the imponderables associated therewith.
[DE] Germany
[FR] France
[IT] Italy
[ES] Spain
[NL] Netherlands
[BE] Belgium
[AT] Austria
[FI] Finland
[IE] Ireland
[EL] Greece
[PT] Portugal
[SK] Slovakia
[LU] Luxembourg
[SI] Slovenia
[LT] Lithuania
[LV] Latvia
[EE] Estonia
[CY] Cyprus
[MT] Malta
Accession year Member country Number of member countries in the eurozone
Source: NORD/LB Fixed Income Research; modelled after the Federal Office for Statistics
Countries outside the
eurozone, which have
pegged their currency to
the euro
There are also some states, most notably in Africa, which have pegged their currency to
the euro. Apart from the former Portuguese colonies Cape Verde Islands and Sao Tomé
and Príncipe, this is the case in the former French colonies Mali, Niger, Chad, Cameroon, Central African Republic, Senegal, Benin, Burkina Faso, Ivory Coast, Togo and
Gabon. Within the EU, Bulgaria has pegged its currency to the euro, as has BosniaHerzegovina, although the country is not yet a member of the European Union. Although
Denmark has not linked the Danish krone 1:1 to the euro, the Danish central bank ensures that the domestic currency fluctuates around the euro by a maximum of +/- 2.25%.
The Swiss National Bank had opted for a similar approach in that its exchange rate policy was designed to ensure the euro did not fall below 1.20 Swiss francs. However, it
abandoned this exchange rate policy on 15 January 2015 after more than three years
because of the strain it was putting on its own foreign exchange reserves.
The euro: a haven of stability
The integration of Europe has made further progress with European Economic and
Monetary Union, finally the member states have agreed to coordinate economic and
fiscal policy more closely within the framework of the Stability and Growth Pact (see
article on the following pages. Nevertheless, fiscal policy remains primarily a national
issue while monetary policy is the responsibility of the ECB. This is independent of political instructions in its actions and is only subject to the goal of price stability specified in
article 127 (1) of the Treaty on the Functioning of the European Union. The latter is defined by the ECB’s Governing Council as an annual increase in the harmonised index of
consumer prices of less than 2%. The group of central bankers led by Mario Draghi and
his predecessors before him can claim that they have almost always been very close to
their inflation target since the introduction of the euro but have rarely achieved an inflation rate of less than 2%, and when they did last year, there were signs of incipient deflation (see chart). Nonetheless, it can be stated that the euro is distinguished by very stable prices, which contributes to its status as one of the world’s hardest currencies. Exchange rate costs have also been entirely eliminated. The international significance of
the euro is also apparent from the fact that it is the world’s second most important currency after the US dollar, given that approximately one quarter of global trade is invoiced
in euro (US dollar over 60%).
Inflation rate in the eurozone according to HICP (in %)
5
4
3
2
1
0
-1
1999-07
2001-07
2003-07
2005-07
2007-07
2009-07
2011-07
2013-07
2015-07
Source: ECB, NORD/LB Fixed Income Research
Key trading partners of the
eurozone
Country Profile
1 Population (Mln. inhabitants)
2 Fläche (qkm)
3 Bruttoinlandsprodukt (EUR Mrd.)
Gross value added by sectors (%)
1 Public admin, educ., human health, social
2 Industry (except construction)
3 Trade, transport, accomodation, food serv.
4 Real estate activities
5 Professional, scientific, technical activities
6 Construction
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
The UK is the European currency union’s most important trading partner, a fact that
opponents of the country’s withdrawal from the EU like to cite, the presumption being
that trade would suffer from a so-called “Brexit”. By contrast, most imports to the eurozone come from China (13.3%), followed by the UK (9.4%) and the USA (9.2%). The
export statistics are led by the UK (13.5%), where somewhat more goods and services
are exported from the eurozone than to the United States (12.95%). China follows at
some distance with a share of exports of 7.1%.
Value
337.4
2,843,139
10103.5
Value
18.5
18.6
21.7
9.9
8.9
22.4
1
2
3
4
5
6
7
8
9
10
Exports (Products)
Weight
Exports (Countries)
Weight
Road vehicles (including air-cushion vehicles)
11.7%
1 United Kingdom
13.5%
Food, beverages and tobacco
7.2%
2 USA
12.9%
Medicinal and pharmaceutical products
6.6%
3 China
7.1%
General industrial machinery and equipment, n.e.s., and6.6%
machine parts, n.e.s.
4 Switzerland
5.8%
Electrical machinery, apparatus and appliances, n.e.s., and
5.8%
electrical parts thereof5(including
Poland non-electrical counterparts, n.e.s.,
5.5%
of electrical household-type
Petroleum, petroleum products and related materials 5.7%
6 Russia
4.3%
Machinery specialized for particular industries
4.5%
7 Sweden
3.3%
Other transport equipment; confidential traffic of section 4.1%
7
8 Turkey
3.1%
Power-generating machinery and equipment
3.5%
9 Hungary
2.4%
Miscellaneous manufactured articles, n.e.s.; confidential3.4%
traffic of section 8
10 Japan
2.3%
Value
274.82
151.929
166.511
k.A.
k.A.
k.A.
-354.703
-8.388
71.14
-442.512
1
2
3
4
5
6
7
8
9
10
Imports (Products)
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 18.4%
1 China
13.3%
Food, beverages and tobacco
6.3%
2 United Kingdom
9.4%
Electrical machinery, apparatus and appliances, n.e.s., and
5.7%
electrical parts thereof3(including
USA
non-electrical counterparts, n.e.s.,
9.2%
of electrical household-type
Road vehicles (including air-cushion vehicles)
5.0%
4 Russia
7.2%
Gas natural and manufactured
4.8%
5 Poland
5.3%
Crude materials
4.4%
6 Switzerland
5.1%
Medicinal and pharmaceutical products
4.3%
7 Sweden
3.3%
Telecommunications and sound-recording and reproducing
4.2%
apparatus and equipment
8 Hungary
2.7%
Articles of apparel and clothing accessories
4.1%
9 Japan
2.6%
Miscellaneous manufactured articles, n.e.s.; confidential3.5%
traffic of section 8
10 Turkey
2.3%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Maturity (short)
3, 6, 9, 12m
max. 12m
3, 6, 12m
3, 6, 9, 12m
3m
6, 9, 12m
3m
6, 12m
max. 12m
Security
Bubills; BUBILL
BTF; BTF
BOT; BOTS
Letras; SGLT
DTC; DTB
DTC; DTB
BTC; BGTB
BTC; BGTB
ATB; RATB
Bubills [DE]
BTF [FR]
BOT, CTZ [IT]
Letras [ES]
DTC [NL]
BTC [BE]
Day count
act/360
act/360
act/360
act/360
act/360
act/360
act/360
act/360
act/360
Coupon type
zero
zero
zero
zero
zero
zero
zero
zero
zero
Cpn frequency
discounted
discounted
discounted
discounted
discounted
discounted
discounted
discounted
discounted
Issuance
monthly
Mon. each week
monthly
once a month
twice a month
once a month
twice a month
once a month
regularly
German Bubills (non-interest bearing treasury bills) cover the traditional maturities of 3,
6, 9 or 12 months and are placed every four weeks. A French BTF with a maturity of
three months is issued every Monday and at the same time a 6-month or 12-month BTF
is auctioned alternately. As a rule, Italian BOT run for 6 or 12 months, but can, according
to the Italian Treasury, also be terminated at 3 months maturity or flexibly (BOT flessibili). Spanish Letras (3, 6, 9, 12 months) once also offered high returns. In the case of
DTC, the three-month maturity is offered every two weeks; other maturities are auctioned every four weeks. Belgian BTCs cover the 3, 6 and 12-month maturities. While
the 3M-BTCs are offered every two weeks, the other two maturities are placed alternately (monthly rota).
EUR bonds eurozone (EURbn) – Maturity profile
Link Rating Overview
1,400
Amount Outstanding (EURbn)
1,200
1,000
800
600
400
200
0
Italy
France
Germany
Core
Spain
Periphery
CCE
2015
118.3
152.1
57.0
38.6
44.0
22.6
0.7
2016
250.3
198.1
183.0
93.8
135.6
38.4
9.3
2017
209.4
141.2
121.0
107.5
86.8
23.3
7.5
2018
158.2
130.9
107.0
90.5
70.8
20.3
2.9
2019
156.9
136.4
96.0
85.6
71.2
37.9
2.5
2020
129.5
115.9
112.0
80.0
70.6
33.4
4.6
2021
131.6
83.8
54.0
53.4
24.0
10.2
3.6
2022
95.2
80.3
62.0
69.8
23.2
8.8
1.1
2023
84.6
97.6
70.0
59.3
37.8
15.5
3.0
2024
78.0
68.9
64.3
47.1
69.3
23.3
3.8
Source: Bloomberg, NORD/LB Fixed Income Research
Core Europe: Netherlands, Belgium, Austria, Finland, Luxembourg
Periphery: Portugal, Greece, Ireland, Cyprus, Malta
Central Europe: Slovakia, Slovenia, Latvia; Estonia (no sovereign bonds issued at present)
2025
48.3
65.1
36.0
40.2
50.4
22.1
4.3
>2025
341.4
315.1
191.7
207.5
134.0
141.2
10.4
Maturity (med.)
Security
Day count
Coupon type
Cpn frequency
Issuance
2Y
Schätze; BKO
act/act
fixed
annual
quarterly
5Y
Bobls; OBL
act/act
fixed
annual
twice a year
2, 5Y
BTAN; BTNS
act/act
fixed
annual
monthly
24M
CTZ; ICTZ
act/365
zero
discounted
month-end
3Y
BTP; BTPS
act/act
fixed
semi-annual
mid-month
5Y
BTP; BTPS
act/act
fixed
semi-annual
month-end
2, 3, 5Y
Bonos; SPGB
act/act
fixed
annual
once a month
3, 5, 10Y
DSL; NETHER
act/act
fixed
annual
1-3 times a year
max. 30Y
OLO; BGB
act/act
fixed
annual
monthly
max. 70Y
Bund.; RAGB
act/act
fixed
annual
once a month
Schätze, Bobls [DE]
Germany, Italy and France constitute the most liquid securities in the two to five-year
BTAN [FR]
maturities. Treasury bills (Schätze; BKO; 2Y) and federal bonds (Bobls; OBL; 5Y) are
CTZ, BTP [IT]
the two German alternatives, while in France these maturities are represented by BTAN
Bonos [ES]
in each case. In the short to medium-term segment, Italy issues BTP as three or fiveDSL [NL]
year bonds. In Italy, CTZ, which are designed as zero bonds, offer two-year maturities
OLO [BE]
from issuance. In the short to intermediate maturity range, the Spanish Ministry of FiBundesanleihen [AT]
nance issues Bonos with maturities of 2, 3 and 5 years. Dutch DSLs are not issued as
two-year bonds. OLO are usually (apart from in August and December) auctioned on the
last Monday of the month. Finnish government bonds are usually placed with higher
maturities (5Y or 11Y), which is why we have included them in the following context.
Maturity (long)
Security
Day count
Coupon type
Cpn frequency
Issuance
10Y
Bunds; DBR
act/act
fixed
annual
3 times a year
30Y
Bunds; DBR
act/act
fixed
annual
every 2 years
7Y to 50Y
OAT; FRTR
act/act
fixed
annual
monthly
7Y
CCT; CCTS
act/act
fixed
semi-annual
occasionally
7Y
BTP; BTPS
act/act
fixed
semi-annual
mid-month
10Y
BTP; BTPS
act/act
fixed
semi-annual
month-end
15, 30Y
BTP; BTPS
act/act
fixed
semi-annual
occasionally
10, 15, 30Y
Oblig.; SPGB
act/act
fixed
annual
once a month
20, 30Y
DSL; NETHER
act/act
fixed
annual
every 5 to 6 years
max. 30Y
OLO; BGB
act/act
fixed
annual
monthly
max. 70Y
Bund.; RAGB
act/act
fixed
annual
once a month
5Y to 30Y
Fin. Govt.; RFGB act/act
fixed
annual
twice a year
max. 50Y
OT; PGB
act/act
fixed
annual
occasionally
>1 year
FRB; IRISH
act/act
fixed
annual
occasionally
5Y to 20Y
ŠD; SLOVGB
act/act
fixed
annual
occasionally
6, 10Y
ŠD; SLOVAK
act/act
fixed
annual
occasionally
5, 10, 15Y
LGB
act/act
fixed
annual
occasionally
5, 10, 15, >15Y
RS; SLOREP
act/act
fixed
annual
occasionally
7, 10Y
LATVIA
act/act
fixed
annual
occasionally
Bunds [DE]
German federal bonds (Bunds; DBR) cover maturities of 10Y and 30Y. While the tenOAT [FR]
year bonds are issued three times a year, 30-year bonds are generally issued every two
CCT, BTP [IT]
years. French OAT have a maturity of at least seven and a maximum of 50 years from
Obligaciónes [ES]
issuance. Spanish Obligaciónes are issued with maturities of 10, 15 and 30 years. AusDSL [NL]
trian federal bonds (RAGB) may have maturities of up to 70 years. RAGB 3.8 01/26/62
OLO [BE]
is the longest-dated sovereign bond in the eurozone ahead of France’s FRTR 4
Bundesanleihen [AT]
Finnish Govt. Bond [FI]
04/25/60. With an outstanding volume of some EUR 40.9bn, FRTR 4 1/4 10/25/23 is the
Obrigações do Tesouro (OT) largest sovereign bond in the eurozone. Various other French bonds also come to well
[PT]
over EUR 30bn. The largest German bonds are currently worth EUR 24bn (DBR 3 3/4
Irish Fixed Rate Bond [IE]
01/04/19 and DBR 3 1/2 07/04/19). Of the issuers listed here, most countries offer volSlovakia Govt. Bond [SK]
umes of between EUR 10bn and EUR 20bn. The bonds issued by Slovakia, Slovenia
Luxemburg Govt. Bond [LU]
and Luxembourg are far smaller, as a rule their sovereign bonds do not exceed
Slovenia Govt. Bond [SI]
Latvian Govt. Bond [LT]
amounts of between EUR 1bn and EUR 3bn.
Maturity
5Y
7Y
5Y
25Y to 40Y
3, 5, 6Y
Security
CCTeu; CCTS
CCT; CCTS
OLO; BGB
VRB; IRISH
ŠD; SLOVGB
Day count
act/360
act/act
act/360
act/act
act/360
Coupon type
FRN (EUR006M)
FRN (GBOTG6M)
FRN (EUR003M)
FRN (EUR006M)
FRN (EUR006M)
Cpn frequency
semi-annual
semi-annual
quarterly
semi-annual
semi-annual
Issuance
once a month
once a month
occasionally
8/2/2013
occasionally
Italy is also the dominant issuer of FRN. CCT have covered the intermediate Italian
maturity segment (7 years) since 1991. Their performance is linked to the 6M BOT yield
CCT, CCTeu [IT]
(Bloomberg: GBOTG6M). Since 2010, CCTeu (5 years) have been issued primarily,
OLO; BGB [BE]
where the reference index is 6M-Euribor (Bloomberg: EUR006M). There are two OLO
Irish Variable Rate Bonds [IE]
series (BGB 0 02/15/16; EUR 3bn and BGB 0 05/02/18; EUR 2.5bn) at present, which
Slovakia Govt. Bond [SK]
are issued as FRN. Eight Irish FRN represent a volume of around EUR 24bn (reference
index: 6M-Euribor), which will mature between 2038 and 2053.
Floating Rate Notes (FRN):
Maturity
5Y
10Y
7Y to 50Y
5, 10, 15, 30Y
2, 5Y
7Y to 50Y
4Y
10Y
Security
Bobl€i; OBLI
Bund€i; DBRI
OAT€i; OAT
BTP€i; BTPS
BTANi; BTAN
OATi; OAT
BTP; BTPS
BONO€i; SGBEI
Index-linked bonds:
Bobl€i and Bund€i [DE]
OATi and BTANi
OAT€i and BTAN€i [FR]
BTP€i, BTP Italia [IT]
BONO€i [ES]
Day count
act/act
act/act
act/act
act/act
act/act
act/act
act/act
act/act
Coupon type
I/L (CPTFEMU)
I/L (CPTFEMU)
I/L (CPTFEMU)
I/L (CPTFEMU)
I/L (FRCPXTOB)
I/L (FRCPXTOB)
I/L (ITCPIUNR)
I/L (CPTFEMU)
Cpn frequency
annual
annual
annual
semi-annual
annual
annual
semi-annual
annual
Issuance
once a month
once a month
once a month
once, month-end
once a month
once a month
twice a month
20/5/2014
From a German perspective, five-year Bobl€i (OBLI) and ten-year Bund€i (DBRI) are
issued, which are both linked to the eurozone’s harmonised consumer price index (HICP
excl. tobacco; Bloomberg: CPTFEMU). Index-linked French bonds may alternatively be
linked to the French consumer price index excl. tobacco (Bloomberg: FRCPXTOB),
meaning that there are four possible combinations in principle. Actually there are only
three alternatives at present (OAT€i; OATi; BTANi). Italy offers two different securities.
BTP€i, which focus solely on the European HICP excl. tobacco, have been created for
institutional investors. With the exception of the three-year maturity, BTP€i replicate the
maturity range of ordinary BTP. However, BTP Italia were originally designed as retail
bonds with a maturity of four years, where the Italian inflation rate excl. tobacco (Bloomberg: ITCPIUNR) acts as the reference index. Spain has also been represented in this
market segment since 20 May 2015 with SPGBEI 1.8 11/30/24.
3
3
2
2
1
1
0
0
-1
06.2014
08.2014
2 Yr
10.2014
4 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
12.2014
5 Yr
02.2015
7 Yr
04.2015
10 Yr
06.2015
30 Yr
-1
08.2015
Yield (%)
Yield (%)
Eurozone Govt Bonds –Yields (%)
Debt continuing to increase
Even if the budget situation in eurozone countries – compared with the period following
the outbreak of the financial crisis – has slowly improved, there is still no question of it
having normalised by any means. The EU19 as a whole reports aggregate total debt of
91.9% of gross domestic product generated with a budget deficit of 2.4%. Among the
members of the European currency union, only Luxembourg, the three Baltic states,
Slovakia and Finland comply with the Maastricht criterion relating to maximum government debt of 60% of GDP. Even Finland will also exceed the 60% limit within the foreseeable future.
Estonia as a model pupil
Estonia stands out among the model pupils from the Baltics. The small country has debt
measured against GDP of only 10.6%. Even Germany, which is regarded as a defender
of austerity policies, exceeds one of the two Maastricht criteria with budget debt of
74.7%. The introduction of the debt ceiling, which Germany has imposed upon itself to
prevent any further expansion in its debt, will not change anything either. However, this
will make a contribution to gradually reducing total debt and using budget surpluses to
repay liabilities.
Gross debt vs. budget balance EU19 (% of GDP)
100
Total revenue vs. total expenditure EU19 (EURbn)
0
5,000
4,500
90
-1
4,000
80
-2
70
3,500
3,000
60
-3
2,500
50
-4
40
2,000
1,500
30
-5
1,000
20
-6
10
500
0
0
-7
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
N.B.: the EU18 figures are shown up to and including 2010
Source: Eurostat, NORD/LB Fixed Income Research
2013
2014
2006
2007
2008
2009
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
2010
2011
2012
2013
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
2014
Comment – Public finances
Since the much discussed Eurobonds have not been introduced to date, a statement
about the creditworthiness of the eurozone as a whole is of limited significance. Ultimately, although there is a single currency, the member countries of the European currency union continue to issue bonds individually. An assessment of the financial situation
of the respective countries can be found in our analyses on the following pages. However, the eurozone acts as a whole alongside the ECB and IMF. In relation to the rescue
packages for individual crisis-stricken countries. The fears of one issuer defaulting have
been ignited primarily by the Greek saga. However, in view of the situation there, it is
difficult to make a reliable statement about the likelihood of Greek government bonds
being repaid. The other programme countries – particularly Ireland – have turned the
corner, but even Spain and Portugal are making progress. In the end, the future budget
situation will depend primarily on growth in the global economy. The onset of another
crisis would be a severe setback for the periphery countries in particular. In this connection, the growth stimuli emanating from the USA are sending out positive signals. Nevertheless, investors should bear in mind the impact that a tighter US monetary policy will
have on yields on the European bond market.
Comment – Bond market
There has been a dramatic fall in yields on all major bond markets since 2014. This
situation is exacerbated by the ECB’s purchase programme which is also pushing prices
to previously unseen levels, as a result of which yields have in turn fallen into negative
territory and were still stuck there in maturities of up to five years (Germany) at the end
of August 2015. The price-distorting effect is set to persist until the announcement of a
withdrawal by the Frankfurt monetary authorities, meaning that it is unlikely that there will
be any significant increase in yields for a year.
Germany
Economy is gaining a lot of momentum
The NUTS-1 regions of
Germany correspond to the
16 German Länder:
In terms of economic output (2014: EUR 2,903.8bn; proportion of eurozone GDP:
28.7%), Germany is number one in the single currency area and number four in the
world as a whole, behind the USA, China and Japan. The German economy is characterised by the high value creation in high-tech sectors and the major importance of the
innovative SME (small and medium-sized enterprises) sector. During the financial crisis,
Germany benefited from relatively low unit labour costs; short-time working softened the
general inflexibility of the employment market during the crisis. The main trading partners are France, the USA and the UK. Germany ranks as the main trading partner for 16
eurozone members. Only Malta and Cyprus have an exchange of goods with Germany
that is less dominant. From a regional viewpoint, about three quarters of German economic output is spread across only five Länder. With a GDP share of 22.1%, NRW is
ahead of Bavaria (17.6%), Baden-Württemberg (14.8%), Lower Saxony and Hesse
(each 8.7%). Major conurbations are Rhine/Ruhr [DEA; DEB] and Rhine/Main [DE7].
According to Eurostat, industry (excluding construction) contributes 25.5% to German
gross value added, significantly more than in France (12.8%) or Italy (18.3%), for example. The most important industries are machinery and transport equipment (SITC 7) and
chemicals (SITC 5). The automotive industry heads the ranking as far as sales are concerned, ahead of mechanical engineering, electrical engineering and chemicals. The
German chemicals and pharmaceutical sector is number one in the eurozone, in front of
France. Promotional banks, business promotion agencies and a dense network of regional chambers of foreign trade form a system that is unique in Europe, making Germany one of the world's most attractive FDI locations. Due to the high deficit in tourism,
Germany's invisible trade balance is traditionally negative. However, this is more than
compensated by a clearly positive position in the balance of trade. As a consequence,
Germany is one of the world's biggest net exporters of capital.
[DE1] Baden-Württemberg
[DE2] Bayern
[DE3] Berlin
[DE4] Brandenburg
[DE5] Bremen
[DE6] Hamburg
[DE7] Hessen
[DE8] Mecklenburg-Vorpommern
[DE9] Niedersachsen
[DEA] Nordrhein-Westfalen
[DEB] Rheinland-Pfalz
[DEC] Saarland
[DED] Sachsen
[DEE] Sachsen-Anhalt
[DEF] Schleswig-Holstein
[DEG] Thüringen
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Industry (except construction)
2 Public admin, educ., human health, social
3 Trade, transport, accomodation, food serv.
4 Real estate activities
5 Professional, scientific, technical activities
6 Construction
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
80.8
357,340
2903.8
Value
25.5
18.4
14.5
12.2
11.4
18.1
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Road vehicles (including air-cushion vehicles)
10.8%
17.2%
1 France
9.1%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 7.3%
parts thereof2(including
USA
non-electrical counterparts, n.e.s.,
8.6%
of electrical household-type
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
7.3%
n.e.s.
3 United Kingdom
7.2%
Food, beverages and tobacco
9.0%
5.6%
4 China
6.7%
Medicinal and pharmaceutical products
6.1%
5.4%
5 Netherlands
6.3%
Other transport equipment; confidential traffic of section 3.8%
7
4.4%
6 Austria
5.0%
Machinery specialized for particular industries
3.3%
4.1%
7 Italy
4.9%
Power-generating machinery and equipment
2.8%
3.8%
8 Poland
4.3%
Manufactures of metals, n.e.s.
3.1%
3.6%
9 Switzerland
4.1%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
3.4%
8
10 Belgium
3.8%
Wert
205.95
184.194
-13.128
-33.646
-6.871
27.39
-250.599
-23.22
-164.966
-45.478
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
8.3%
1 Netherlands
13.4%
Road vehicles (including air-cushion vehicles)
8.0%
8.2%
2 France
8.1%
Food, beverages and tobacco
8.6%
7.3%
3 China
6.9%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 7.0%
parts thereof4(including
Belgium non-electrical counterparts, n.e.s.,
6.3%
of electrical household-type
Crude materials
4.3%
4.2%
5 Italy
5.5%
Medicinal and pharmaceutical products
4.9%
4.1%
6 Poland
4.8%
Other transport equipment; confidential traffic of section 3.0%
7
4.1%
7 Czech Republic
4.5%
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
4.0%
n.e.s.
8 United Kingdom
4.5%
Gas natural and manufactured
3.0%
3.7%
9 Austria
4.4%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
3.6%
8
10 Switzerland
4.2%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Despite Greece crisis,
German economy is on
track for growth
Germany is again living up to its reputation, having reported surprisingly high export
figures. This is due to the greater demand from Europe. Trade with non-eurozone EU
countries (such as the UK and Poland) also increased. One reason for this is the positive
impact of the currency situation, which is very helpful to German exporters. In addition,
'Made in Germany' products remain very much in demand. Besides the weak euro, the
low price of oil is acting like an economic stimulus package on the German economy.
Petroleum makes up around two thirds of all energy imports (SITC 3), while natural gas
accounts for about 30%, the rest is coal. The main countries supplying oil are the former
CIS countries (more than 45%) and the North Sea production countries (around a quarter).
Germany's debt manager is
the German Finance Agency
In Germany, the German Finance Agency is responsible for borrowing and debt management. Around EUR 1,137 billion (162 bonds) have been placed as at 14 August
2015, including inflation-indexed bonds and non-interest bearing treasury bills. This
positions Germany in third place as an issuer within the single currency area, behind
Italy and France. According to the issue planning for 2015, about EUR 185bn will be
issued, of which EUR 38.5bn is accounted for by the money market. The Finance Agency provides a compressed overview of scheduled issues in an annual overview. Depending on the maturities segment (short, medium and long-term), the capital market
instruments concentrate on three different variants (treasury bills, bonds, German government bonds). In some cases these are also issued as an inflation-indexed security.
The German federal government reserves the right to issue additional financing instruments, depending on market conditions and other basic data.
Collective action clauses and
stripping
Amended issue conditions have been in place since 1 January 2013 due to the introduction of collective action clauses (CACs). This involves implementation of a requirement
in the treaty establishing the European Stability Mechanism (ESM), stipulating that "collective action clauses shall be included ... in all new euro area government securities,
with maturity above one year". This amendment to the issue conditions has the consequence that capital and coupon strips resulting from these German government bonds
must also have collective action clauses. The German federal government decided to redefine the stripping dates, starting from 2013. Since the start of 2013, the due dates for
interest and capital have been standardised as 15 February, 15 May and/or 15 August.
EUR bonds Germany (EURbn) – Maturity profile
Ratings Overview
200
LT
Outlook
Fitch
AAA
Stable
160
Moody’s
Aaa
Stable
140
AAAu
Stable
Last updated: 20 August 2015
Amount Outstanding (EURbn)
S&P
180
120
100
80
60
40
20
0
BULABO
OBLI
BUBILL
DBRI
BKO
OBL
DBR
2015
2016
2017
2018
2019
2020
3.0
2021
2022
2023
2024
2025
>2025
15.0
12.0
29.0
16.0
14.5
15.0
53.0
50.0
50.5
16.0
32.0
50.0
39.0
51.0
41.0
48.0
48.0
29.0
60.0
16.0
54.0
62.0
54.0
12.5
64.3
32.0
178.2
Source: Bloomberg, NORD/LB Fixed Income Research
How low could German yields While the net yield last year was still more than 1% at the editorial deadline for this pubfall before there is a buyer
lication, in 2015 it opened at only 0.48%. On 17 April it reached the lowest level ever
strike?
recorded, 0.05% – almost unimaginable. The considerable movements in yields, both in
one direction and then in the other, had not been expected after the start of the ECB's
bond purchase programme. The net yield posted its high for the year at 0.80% on 10
June, subsequently falling back to the level seen at the start of the year. The yield on
Bunds was at times in negative territory up to maturities of eight years. It was not until
August that two-year instruments posted the lowest yield ever recorded. We do not wish
to belabour the highlighted "Japanese scenario", but the finance minister would probably
not have dreamt in the past that the Finance Agency of the Federal Republic of Germany would one day earn money with the issue of bonds.
Maturity
3, 6, 9, 12m
Security
Bubills; BUBILL
Unverzinsliche
Schatzanweisungen
(Bubills; BUBILL)
Maturity
2Y
Maturity
5Y
Maturity
10Y
30Y
Day count
act/act
Day count
act/act
Issuance
once a month
Coupon type
fix
Cpn frequency
annual
Issuance
quarterly
Coupon type
fix
Cpn frequency
annual
Issuance
semi-annual
German federal medium-term bonds (Bobls; OBL) have been in existence since 1975
and are issued with a five-year maturity. In 2015 two new series are scheduled, starting
in April and October at EUR 5bn in each case. Each series will be increased to an outstanding volume of EUR 19bn and EUR 20bn respectively (totalling EUR 39bn) in the
subsequent months. At present, 16 Bobls with a volume of EUR 259.0bn have been
placed.
Security
Bunds; DBR
Bunds; DBR
Day count
act/act
act/act
Coupon type
fix
fix
Cpn frequency
annual
annual
Issuance
3 times a year
every 2 years
German government bonds (Bunds; DBR) have been on the market since 1952, covering maturities of 10y or 30y. Since Bunds make up around 63% of the debt portfolio,
they are the main source of refinancing for the German state. All in all, 46 securities with
a total volume of EUR 742.5bn have been issued (including 30 Y). It is possible to separate capital claims and interest entitlement (stripping) in the case of all Bunds. Following
three new issues in 2014, two new 10-year German government bonds (maturing on 15
February and 15 August 2025, respectively) were issued in the months of January and
July in 2015. The initial issue volume is EUR 5bn. Five increases are scheduled in subsequent months until the Bunds have each reached a volume of EUR 23bn. The bottom
line is an issue volume of EUR 46bn, which is EUR 8bn less than the previous year. In
the thirty-year maturities segment, the German federal government in 2015 only intends
to increase the German government bond issued in February 2014 in three phases.
EUR 2bn will be issued in each of the months of January, May and September. This
produces a volume of EUR 6bn. The 30 Y maturity was included in the product range in
1997 and currently represents a total amount of EUR 205.5bn.
Bundesanleihen
(DBR)
Maturity
5Y
10Y
Cpn frequency
discounted
Federal treasury bills (Schätze; BKO) have a two-year maturity and have been issued in
a quarterly cycle (February, May, August, November) since September 1996. Federal
treasury bills are usually increased to volumes of EUR 14bn each in the two months
after issue. The resulting EUR 56bn in 2015 represents almost one third of the German
federal government's total issue volume. A volume of EUR 140.0bn is currently issued,
spread over eight securities.
Security
Bobls; OBL
Bundesobligationen
(OBL)
Coupon type
zero
Non-interest bearing treasury bills (Bubills; BUBILL) are discounted money-market instruments that generally have maturities of 3, 6, 9 or 12 months. At present (14 August
2015), 16 Bubills cover a volume of EUR 28.5bn. According to the Finance Agency,
paper will be issued once a month in 2015, with maturities of 6 or 12 months. The volume per issue of 6M Bubills is EUR 2bn, while 12M Bubills are issued monthly in the
amount of EUR 1.5bn. The German federal government has stated that the planned
issue volume for 2015 will be EUR 38.5bn.
Security
Schätze; BKO
Bundesschatzanweisungen
(BKO)
Day count
act/360
Security
Bobl€i; OBLI
Bund€i; DBRI
Inflation indexed bonds exist
as Bundesobligationen
(Bobl€i) and Bundesanleihen
(Bund€i)
Day count
act/act
act/act
Coupon type
I/L (CPTFEMU)
I/L (CPTFEMU)
Cpn frequency
annual
annual
Issuance
monthly tapped
monthly tapped
Inflation-indexed securities were not included in the product range until relatively late
(2006). All Bund€i that now exist have been increased regularly since inaugural issue,
although none has been repaid so far. In 2015 the Finance Agency intends to issue a
volume between EUR 10bn and EUR 14bn. At present, EUR 59.5bn is available as
Bund€i (DBRI): the three older instruments in the amount of EUR 15bn or 16bn, and the
three newer securities with longer maturities, amounting to EUR 2.5bn and EUR 5bn. An
additional EUR 15.0bn has been placed as a five-year Bobl€i (OBLI) on the market
(OBLI 0 ¾ 04/15/18). Linkers are generally offered on every second Tuesday in a month
(exceptions: August, December). Both Bobl€i and Bund€i are linked to the performance
of the European HCPI index ex tobacco (Bloomberg: CPTFEMU).
Maturity
7Y
Security
Day count
act/act
D-Bond; BULABO
Coupon type
fest
Cpn frequency
annual
Issuance
26/6/13
Bund-Länder-Anleihe
(„Deutschland Bond“)
In 2013 a bond was issued jointly by the German federal government and the Länder
(BULABO 1 ½ 07/15/20; EUR 3bn) for the first time. In this case the issuers are liable on
a several (but not joint) basis. Only the portion issued by the Federal Republic of Germany (13.5% of the issue volume) is subject to the collective action clauses introduced
with effect from 1 January 2013, while the portions issued by the Länder are not affected
by the introduction of collective action clauses (CAC) throughout Europe. With regard to
the Länder, the proportion issued by NRW is the highest (20.0%). Bavaria, BadenWürttemberg, Hesse and Lower Saxony did not participate in this first issue of a D bond.
Other German Govt
Securities: FX bonds,
Securitized Loans (SSD)*
Optionally, the German federal government is entitled to issue FX bonds or raise borrower’s note loans (SSD) "in the appropriate market conditions". The USD bonds GERMAN 3 ⅞ 06/01/10 and GERMAN 1 ½ 09/21/12 have so far remained exceptions. SSD
have remained at a level around EUR 12bn (as at year-end 2014) since the end of 2010.
*SSD are no securities, but loans
confirmed by documents
3
3
2
2
1
1
0
0
-1
06.2014
Yield (%)
Yield (%)
German Govt Bonds –Yields (%)
-1
08.2014
2 Yr
10.2014
4 Yr
12.2014
01.2015
5 Yr
04.2015
7 Yr
06.2015
10 Yr
08.2015
30 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
Improvement in financial
balance
Government debt fell once again in 2014 when compared with the previous year. It was
74.7% of GDP (2013: 77.1% of GDP). Following a rise of 0.1% of GDP in 2013, the
German state managed to generate a financial balance of 0.7% of GDP in 2014. Positive balances were achieved by the federal government (EUR 2.4bn), the Länder (EUR
1.3bn) and social security (EUR 3.0bn). Only the municipalities/municipal associations
reported a loss of EUR 0.7bn. Through the debt brake, which entered into force in 2011
and is anchored in constitutional law, together with supporting legislation, Germany laid
the foundation for sustainable compliance with the requirements of the Stability and
Growth Pact. In the stability programme the state revenue ratio relative to GDP was
stated as 44.8% for 2014.
Social contributions are the
most important item on the
revenue side
In 2014, total German revenue rose to EUR 1,295.0bn (2013: EUR 1,249.4bn). Revenue
from current taxes on income, wealth etc. amounted to EUR 346.8bn in 2014 (2013:
EUR 333.3bn). With a share of 26.8%, however, this is only the second-biggest item.
The largest single item is traditionally social contributions amounting to EUR 481.6bn
(2013: EUR 465.4bn), representing 37.2% of total revenue. Taxes on production and
imports (EUR 313.6bn) account for around a quarter of all revenue and likewise increased in comparison with 2013 (EUR 304.5bn). Even other revenue (EUR 151.8bn)
rose year-on-year (2013: EUR 146.2bn). For simplification purposes we include property
income (European System of Accounts - ESA 95: D.4), even though this diverges from
the method used by the German Federal Ministry of Finance.
Expenditure is slightly below
the level of revenue
Total expenditure grew to EUR 1,274.4bn (2013: EUR 1,245.3bn). More than half of this
amount (54.3%) was allocated to monetary social security benefits and social transfers
in kind (EUR 691.6bn; 2013: EUR 666.8bn). Other expenditure (22.4% of total expenditure) rose from EUR 279.7bn (2013) to EUR 285.9bn. Employee compensation (EUR
223.8bn; 2013: EUR 217.6bn) followed in 3rd place, accounting for 17.0%. Due to continuing moderate interest expenses resulting from the favourable conditions on capital
markets, interest payable in 2014 fell again. This amounts to EUR 50.6bn (2013: EUR
56.3bn), making up only 4.0% of all expenditure. Asset transfers, which had totalled
EUR 24.8bn in 2013, were also down. They amounted to EUR 22.4bn in 2014.
Gross debt vs. budget balance (%)
Total revenue vs. total expenditure (EURbn)
100
1
1,400
90
0
1,200
80
1,000
70
-1
60
800
50
-2
600
40
-3
30
400
20
-4
200
10
0
-5
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
2005
2014
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
Comment – Public finances
2006
2007
2008
2009
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
2010
2011
2012
2013
2014
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
Germany's high degree of international competitiveness is primarily due to the innovative power of its companies. While the country is heavily dependent on energy imports,
complex products and systems dominate its exports, with price positioning in the upper
segments of international trade. On this basis Germany managed to generate high current account surpluses even during the financial crisis. Compared with other European
countries, the German budgetary situation is extremely solid.
Strengths & opportunities
Weaknesses & risks
+
High degree of international competitiveness
–
International criticism of current account surplus
+
High innovative power, especially SMEs
–
EU criticises focus on direct taxes
+
Reforms (labour market, debt brake)
–
Cost of healthcare and pension system
+
Solid budgetary situation
–
Additional expenditure on transition to alternative
energy sources
+
Political stability
–
(Partial) modernisation of infrastructure required
+
AAA credit rating, very high liquidity of bonds
–
Low yields, in some cases negative
Source: NORD/LB Fixed Income Research
Comment – Bond market
German Bunds benefit from the existence of the European common currency and the
common monetary policy pursued by eurozone countries. Although the yield on German
government bonds has settled at a low level due to the financial crisis, there still does
not appear to be any buyer strike, even with negative yields. From an investor viewpoint,
this kind of clustering of economic strength and high credit rating is extremely positive
with regard to the security of the capital investment. Coversely, German government
bonds continue to offer the lowest yields in the eurozone, so from a yield viewpoint,
Bunds are hardly very promising. Due to their excellent ratings and high liquidity, German government bonds are in demand, especially in "flight-to-quality" periods.
France
A sleeping giant
France is divided into nine
NUTS-1 regions:
With GDP of EUR 2,132.4bn (2014: at market prices), France is the second-biggest
economy in the eurozone and fifth in the world as a whole. In contrast to Germany,
which is known throughout the world for its SMEs, the French economy is very much
dominated by large companies. For example, France has the fourth-largest number of
corporations in the Forbes ranking of the 2,000 biggest companies in the world (France:
61; Germany: 45). The largest country by area in the eurozone also has one of the highest birth rates in the Western world (2.01). Combined with immigration from the Maghreb, this results in annual population growth of 0.4% and an increase in the number of
inhabitants to 65.8m (2014). French companies in the hi-tech sectors are world-class,
due to the high quality of work done in research and education. In addition to aviation
(EADS, Airbus), the country's strengths are primarily in the energy sector (including
Total, EDF, GDF Suez). In this respect, France also benefits from its good relations with
its former colonies in Africa. It is also world market leader in the luxury segment, encompassing clothing, perfumes and food. Each year, France is host to more than 84 million
overnight stays by foreign guests, making it by far the most popular travel destination in
the world. The French also hold a strong position in the insurance and financial industry
with some very large companies (Axa, Société Général, Crédit Agricole, BNP Paribas,
etc.). Their robustness was demonstrated in the most recent bank stress test. The ECB
did not have any complaints and did not identify any credit squeeze that could hinder the
real economy.
[FR1] Île-de-France
[FR2] Bassin-Parisien
[FR3] Nord-Pas-de-Calais
[FR4] Est
[FR5] Ouest
[FR6] Sud-Ouest
[FR7] Centre-Est
[FR8] Méditerranée
[FR9] Départements d’outre-mer
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Public admin, educ., human health, social
2 Trade, transport, accomodation, food serv.
3 Real estate activities
4 Industry (except construction)
5 Professional, scientific, technical activities
6 Construction
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
65.8
632,834
2132.4
Value
22.9
18.2
13.3
12.8
12.4
20.4
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Food, beverages and tobacco
9.0%
12.4%
1 Germany
16.7%
Other transport equipment; confidential traffic of section 3.8%
7
10.8%
2 Belgium
7.4%
Road vehicles (including air-cushion vehicles)
10.8%
8.0%
3 Italy
7.3%
Medicinal and pharmaceutical products
6.1%
6.2%
4 Spain
7.2%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 5.7%
parts thereof5(including
United Kingdom
non-electrical counterparts, n.e.s.,
7.1%
of electrical household-type
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
4.7%
n.e.s.
6 USA
6.4%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
4.4%
8
7 Netherlands
4.1%
Power-generating machinery and equipment
2.8%
4.2%
8 China
3.8%
Essential oils, resinoids and perfume materials; toilet, polishing
1.5% and cleaning
3.4% preparations
9 Switzerland
3.0%
Iron and steel
2.9%
3.0%
10 Poland
1.7%
Value
-27.75
-62.284
36.247
10.347
-1.728
27.628
15.885
6.657
99.536
-107.944
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
10.8%
1 Germany
19.5%
Food, beverages and tobacco
8.6%
8.7%
2 Belgium
11.2%
Road vehicles (including air-cushion vehicles)
8.0%
8.3%
3 Italy
7.6%
Other transport equipment; confidential traffic of section 3.0%
7
5.4%
4 Netherlands
7.5%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 5.2%
parts thereof5(including
Spain non-electrical counterparts, n.e.s.,
6.6%
of electrical household-type
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
5.1%
8
6 China
5.0%
Medicinal and pharmaceutical products
4.9%
4.8%
7 USA
5.0%
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
3.8%
n.e.s.
8 United Kingdom
4.3%
Articles of apparel and clothing accessories
3.2%
3.7%
9 Switzerland
3.0%
Gas natural and manufactured
3.0%
3.1%
10 Russia
1.9%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Low-key efforts at reform
have not borne any fruit so
far
In contrast, the formerly robust automotive industry is now in a consolidation phase,
resulting in plant closures. These measures are symbolic of the relocation of industrial
jobs and are a factor contributing to the 30% rise in unemployment since the start of the
financial crisis, to its present level of 10.3% (06/2015). This is attributable to the rigid
labour market and the high unit labour costs, which have significantly weakened the
country's competitiveness. The socialist government came to power on the platform that
it would get a grip on the endemic unemployment. However, the low-key efforts at reform have yet to bear fruit. The foreign trade surplus totalling 2.6% of GDP before joining the eurozone mutated into a deficit amounting to EUR 53.8bn last year. Low GDP
growth is the main problem of the French economy. Despite the highest productivity
among the five largest European economies, France's economy has been stuck in stagnation for about ten years: since President Hollande took office, growth rates have been
moving between 0.3% and 0.4%. The country's diminishing attractiveness as a business
location is also reflected in the current Doing Business report, in which France takes
31st place, behind even Macedonia.
Agence France Trésor offers
three categories of standard
securities:
Agence France Trésor (AFT) is responsible for managing the national debt and treasury.
In 1985 the French treasury reformed government borrowing, resulting in a
product range based on three categories of standard securities: BTF (Bons du
Trésor à taux fixe et à intérêt précompté), BTAN (Bons du Trésor à taux fixe et à intérêt
annuel) and OAT (Obligations Assimilables du Trésor). Transactions in these three classes have been settled through the Relit grande vitesse (RGV) system by Euroclear
France since mid-1998. The high liquidity of all French government bonds is boosted
along the curve by an active market in stripped bonds. France was the first European
issuer (1991) to introduce the stripping and reconstruction of government bonds. According to information provided by AFT, around 64.4% (03/2015) of all issued debt securities
is held by non-French. AFT's current total of medium and long-term securities
(BTAN/OAT) amounts to EUR 1,429bn. New issues are announced in the Issue
Calendar.
BTF
BTAN
OAT
Outstanding government
bonds
France currently has debt instruments in the amount of about EUR 1,563.7bn, of which
around 90% is allocated to the capital market and the rest to the money market (BTF).
The issue yields of French OAT have fallen steadily in real terms over the past few
years. In mid-April 2015 the yield on 10-year paper reached the lowest level ever recorded, at 0.33%. Like so many other countries, France is also benefiting from the low
interest rates and the ECB's bond purchase programme.
EUR bonds France (EURbn) – Maturity profile
Ratings Overview
275
LT
Outlook
Fitch
AA
Stable
Moody’s
Aa1
Negative
S&P
AAu
Negative
250
200
Amount Outstanding (EURbn)
Last updated: 20 August 2015
225
175
150
125
100
75
50
25
0
BTNS - OAT
BTNS - BTANi
BTF
FRTR - BTAN
FRTR - OATi
FRTR - OAT€i
FRTR - OAT
2015
103.1
2016
55.2
9.1
55.1
2017
49.4
2018
2019
31.0
35.4
11.2
20.2
41.9
74.9
71.6
11.3
88.7
89.8
2020
2021
2022
6.1
20.3
95.6
77.7
2023
2024
13.7
17.9
62.3
82.6
10.9
58.4
2025
>2025
3.4
8.5
35.4
268.6
55.0
Source: Bloomberg, NORD/LB Fixed Income Research
Maturity
3, 6, 12m
BTF
Security
BTF; BTF
Day count
act/360
Coupon type
zero
Cpn frequency
discounted
Issuance
weekly, Monday
Short-term financing needs are covered through the issue of BTF, which balance out the
timing-related mismatches between state revenue and expenditure. Each week a BTF
with a three-month term is issued. If the Monday falls on a holiday, the issue is postponed until the next working day. Optionally, a half-year or whole-year BTF is auctioned.
Depending on finance requirements, some BTF may also be issued outside the dates
scheduled in the issue calendar, with terms of four to seven weeks. EUR 157.7bn is
currently spread across 24 BTF.
Maturity
2, 5Y
Security
BTAN; BTNS
Coupon type
fest
Cpn frequency
annual
Issuance
monthly, 3rd Th.
BTAN are fixed-interest treasury notes with an annual coupon. They represent the
state's medium-term debt securities. On issue, they have a maturity of two or five years.
They are auctioned on the third Thursday of each month, as scheduled in a semi-annual
issue calendar that is published in advance. On this occasion the state issues at least
one BTAN line with a maturity of two or five years. At present a volume of EUR 113.7bn
is in circulation in five different securities. All paper that is currently still in circulation was
issued in 2011 or 2012 and therefore forms part of the five-year category. Four securities have a fixed coupon and in total an outstanding volume of more than EUR 20bn.
Only one instrument (BTNS 0.45 07/25/16) has variable interest and totals less than
EUR 10bn.
BTAN
Maturity
7 to 50Y
Day count
act/act
Security
OAT; FRTR
Day count
act/act
Coupon type
fest
Cpn frequency
annual
Issuance
st
monthly, 1 Th.
OATs are long-term fixed-interest French government bonds. They are issued with maturities of at least 7 years and not more than 50 years. With the exception of August and
December, OAT auctions are always held on the first Thursday of each month. The due
dates of OAT and the associated interest payments fall either on 25 April or 25 October.
EUR 1,133.5bn is currently in circulation.
OAT
Maturity
5Y
10Y
10Y
Security
BTANi; BTNS
OATi; FRTR
OAT€i; FRTR
Inflation-indexed bonds:
OATi und BTANi
OAT€i und BTAN€i
Day count
act/act
act/act
act/act
Coupon type
I/L (FRCPXTOB)
I/L (FRCPXTOB)
I/L (CPTFEMU)
Cpn frequency
annual
annual
annual
Issuance
occasionally
occasionally
occasionally
Inflation-indexed bonds (total EUR 158.9bn) are offered in three variants (BTANi; OAT€i;
OATi). OATi have existed since mid-September 1998, while OAT€i were placed for the
first time in October 2001. The respective bond is linked either to the French consumer
price index ex tobacco (Bloomberg: FRCPXTOB) or to the harmonised consumer price
index ex tobacco for the Eurozone (HCPI ex tobacco; Bloomberg: CPTFEMU). In both
cases, investors receive a known fixed percentage as interest payment on the invested
capital, plus a variable component based on the rate of inflation as defined in that particular case. The due date of the OAT and the coupon date are set on the 25th of the
month. Similarly, the bonds in the medium maturities segment are usually also available
in two variants (BTANi, BTAN€i).
3
3
2
2
1
1
0
0
-1
06.2014
08.2014
2 Yr
10.2014
4 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
12.2014
5 Yr
02.2015
7 Yr
04.2015
10 Yr
06.2015
30 Yr
-1
08.2015
Yield (%)
Yield (%)
French Govt Bonds –Yields (%)
National debt heading
towards 100% mark
France's national debt was 95% of GDP in 2014. In line with OECD projections, it is
moving towards the 100% mark in 2016. The country has breached the Maastricht criteria each year since 2009. These stipulate maximum new borrowing of 3% of GDP. In
2009, when new borrowing was 7.2%, this could still be justified by the measures needed to cope with the financial crisis. Even six years after the Lehman crash, however, the
government has only managed to reduce new borrowing to 4.0%. Although the government had promised to adhere to the deficit limit as early as this year, the European
Commission granted two further years of deferral in June, when it became apparent that
the country would once again fall foul the 3% limit. Even though the French economic
model traditionally envisages a high level of input by the state, its government spending
ratio of 57.3% (2014) indicates that public spending is excessive. France even spends
more than countries such as Denmark (56.0%) and Sweden (50.3%). From a historical
perspective, state contribution to GDP in these countries is well above-average. The
mushrooming of government spending is partly the result of inordinate bureaucracy,
especially at regional and local level: for example, the French administration employs
more staff than the whole of Germany, even though its neighbour has about 17 million
more inhabitants. At 22%, the ratio of civil servants to the total number of employed
persons is about twice as high as Germany's.
Total revenue is growing
faster than expenditure
While total revenue has risen by EUR 135bn since 2008, total expenditure increased by
EUR 165bn over the same period. Fortunately, this trend has reversed in 2014. Last
year France's total revenue went up by 1.9% to EUR 1,141.2bn. Although this figure was
exceeded by total expenditure of EUR 1,226.5bn, the latter only gained 1.6% year-onyear. Accordingly this put some slight pressure on the budget balance. Social contributions (EUR 408.5bn) accounted for most of the total revenue, followed by taxes on production and imports as the second most important source of revenue, with a volume of
EUR 336.9bn. The revenue situation for taxes on income and wealth is critical, since it
has practically stagnated year-on-year at EUR 270.0bn. On the expenditure side, by far
the biggest proportion was attributable to social benefits and social transfers. EUR
557.8bn was spent on this item in 2014, corresponding to 45.5% of total expenditure.
Thanks to the favourable refinancing conditions, the interest burden went down by EUR
0.9bn to EUR 47.0, despite the level of debt rising overall.
Gross debt vs. budget balance (%)
Total revenue vs. total expenditure (EURbn)
100
0
90
-1
1,400
1,200
80
-2
1,000
70
-3
60
800
50
-4
600
40
-5
400
30
-6
20
200
-7
10
0
0
-8
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
2013
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
2014
Reforms already
implemented
The Hollande administration is well aware of the urgent need to boost competitiveness
and has already set some legislation in motion. The CICE (Crédit d’impôt Compétitivité
Emploi), which was passed in 2014, has reduced the tax burden on companies by EUR
10.4bn. Including the relief provided to companies through the reduction in indirect labour costs, it has saved companies EUR 12.0bn. The Pact for Responsibility and Solidarity came into effect in January 2015 and reduced the indirect labour costs for low
earners to the level of the minimum wage. The Macron law provides for a reduction in
the entry barriers for certain professional groups. Reporting requirements for small enterprises are also being cut. Due to the disproportionate rise in the time spent on bureaucracy, these requirements have so far hindered small firms in raising their headcount above 50. The Law on Growth, Activity and Equal Economic Opportunities,
passed in July 2015, provides by way of example an easing of opening times, greater
coverage by the mobile network, stronger competition among notaries and pharmacists,
and a significant expansion of the broadband network.
Comment – Public finances
France's economy is currently being supported by positive external factors. For example,
companies a benefiting from the low interest rate policy pursued by the ECB, the export
sector is being supported by the weak euro, and the low price of crude oil is increasing
purchasing power. This in turn is boosting consumer demand. In the short term this
should help to stimulate economic growth and fulfil the forecasts, which estimate GDP
growth of 1% to 1.7% in the coming years. Additional substantial reforms are nonetheless necessary to raise the French economy to a higher level of growth over the long
term. A higher level could take pressure off the national budget by generating rising tax
revenue and incurring lower expenditure on unemployment benefits. The resistance from
the left wing of the government against further reform should be food for thought. This
was already apparent when the law on liberalising the French service sector was
passed. In this instance the government made use of the power to pass legislation without parliamentary approval. By doing so, the government has played its trump card,
since it may only resort to this exception once in each legislative period. The distressed
situation of PSA Peugeot Citroën, nuclear power group Areva and Alstom will also have
a negative impact on the budget, as they could all possibly request state aid. For 2017 it
has been agreed with the European Commission to squeeze new borrowing down to
2.8%. By then, the government envisages savings of EUR 15 to 20bn. The OECD is
nevertheless warning even at this stage that achieving the objective could be jeopardised if no further reforms are carried through, or negative external shocks occur.
Stärken & Chancen
Schwächen & Risiken
+
High productivity
–
Rigid labour market
+
Dynamic demographics
–
New borrowing remains above 3% limit
+
Strong global player
–
Excessive government spending
+
High FDI inflows
–
Tax burden dampens investment incentives
+
Well-developed infrastructure
–
Current-account deficits
+
Strong research and education sector
–
+
High secondary market liquidity
Indirect labour costs put pressure on
competitiveness
Source: NORD/LB Fixed Income Research
Comment – Bond market
Investors who put their money into French government bonds are placing their faith in
the commitments of the French government to reduce its budget deficit. Due to the international importance of the French economy and the high issue volume of its government
bonds, France could potentially become an AAA-rated country. On the bond market it
has rightly slipped into the AA segment.
Italy
Investment programme proposed for Mezzogiorno
Italy consists of five NUTS-1
regions and 19 NUTS-2
regions:
The new regulations for calculating GDP make the trend in economic growth a lot less
dramatic than before the switch. GDP was EUR 1,616.3bn in 2014, up about 0.4% in
comparison with the previous year (2013: EUR 1,609.5bn). However, looking at the
trend in the past eight years, it is very clear that economic growth is stagnating. Nevertheless, Italy remains the third-largest economy in the Eurozone, accounting for around
16%. A comparison of NUTS-1 regions makes it apparent that Italy's north [ITC: 32.4%;
ITD: 23.1%] generates more than half of economic output. Central Italy [ITE] contributes
21.6% to GDP, while the structurally weak south [ITF] only generates 15.4%. The Mediterranean islands of Sicily and Sardinia [ITG], with an economy based principally on
tourism and agriculture, round off Italy's GDP with a contribution of 7.4%. Italy has several major conurbations, the most important of which is the Industrial Triangle in the
north-west [ITC], the points of which are formed by Turin (Piedmont), Milan (Lombardy)
and Genoa (Liguria). Milan is the leading financial, services and fashion centre. Cars,
railways, aircraft and components for the aerospace industry are manufactured in Turin.
The north of Italy is also the cradle of the European banking system. In central Italy [ITE]
the economy is concentrated around the capital, Rome [ITE4]. Main trading partners are
Germany and France. In the wake of the resignation of Silvio Berlusconi in 2011, the
country plunged into an internal political crisis. This resulted in frequent changes of government. Italy has been led by the cabinet headed by prime minister Matteo Renzi since
February 2014. During his period in office so far, young and ambitious Renzi has
achieved more than his immediate predecessor. Matteo Renzi managed to implement a
major reform project, the change to electoral law, in the first half-year. This is intended to
make future governments more stable and counteract political and economic stagnation.
[ITC] Nord-Ovest:
[ITC1] Piemonte
[ITC2] Valle d'Aosta
[ITC3] Liguria
[ITC4] Lombardia
[ITD] Nord-Est:
[ITD1] Provincia Autonoma di Bolzano
[ITD2] Provincia Autonoma di Trento
[ITD3] Veneto
[ITD4] Friuli-Venezia Giulia
[ITD5] Emilia-Romagna
[ITE] Centro (IT):
[ITE1] Toscana
[ITE2] Umbria
[ITE3] Marche
[ITE4] Lazio
[ITF] Sud:
[ITF1] Abruzzo
[ITF2] Molise
[ITF3] Campania
[ITF4] Puglia
[ITF5] Basilicata
[ITF6] Calabria
[ITG] Isole:
[ITG1] Sicilia
[ITG2] Sardegna
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Trade, transport, accomodation, food serv.
2 Industry (except construction)
3 Public admin, educ., human health, social
4 Real estate activities
5 Professional, scientific, technical activities
6 Construction
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
60.8
302,073
1616.3
Value
20.8
18.3
16.8
14.3
8.8
20.9
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
10.5%
n.e.s.
1 Germany
12.8%
Food, beverages and tobacco
9.0%
7.9%
2 France
10.7%
Road vehicles (including air-cushion vehicles)
10.8%
6.9%
3 USA
7.6%
Machinery specialized for particular industries
3.3%
5.6%
4 United Kingdom
5.3%
Medicinal and pharmaceutical products
6.1%
5.1%
5 Switzerland
4.9%
Articles of apparel and clothing accessories
2.1%
4.7%
6 Spain
4.5%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 4.5%
parts thereof7(including
Belgium non-electrical counterparts, n.e.s.,
3.3%
of electrical household-type
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
4.2%
8
8 China
2.7%
Manufactures of metals, n.e.s.
3.1%
4.1%
9 Poland
2.6%
Iron and steel
2.9%
4.1%
10 Turkey
2.5%
Value
15.80
37.24
2.985
12.754
-7.813
-1.956
-24.38
-11.417
13.313
-21.729
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
10.8%
1 Germany
15.5%
Food, beverages and tobacco
8.6%
9.7%
2 France
8.7%
Road vehicles (including air-cushion vehicles)
8.0%
7.5%
3 China
7.1%
Crude materials
4.3%
5.4%
4 Netherlands
5.6%
Medicinal and pharmaceutical products
4.9%
5.2%
5 Spain
4.8%
Gas natural and manufactured
3.0%
4.6%
6 Russia
4.6%
Iron and steel
2.6%
4.0%
7 Belgium
4.2%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 4.0%
parts thereof8(including
USA
non-electrical counterparts, n.e.s.,
3.5%
of electrical household-type
Articles of apparel and clothing accessories
3.2%
3.7%
9 Switzerland
3.0%
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
3.6%
n.e.s. 10 United Kingdom
2.9%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Italians bring the postal
service to the stock market
Italy is pressing ahead with its privatisation projects. Proposals put forward by the Italian
Finance Ministry would float Poste Italiene on the stock market in the autumn of this
year. The plan is to sell up to 40% of the shares in order to reduce the country's debt
mountain further. According to a report by Reuters news agency, it is expected that in
2016 a part of the Italian railways will be offered on the stock market. By doing so, the
Italians would meet the demands of the European Commission and IMF to press on with
privatisation.
Brenner Base Tunnel – a
milestone for Italian infrastructure
Forming part of a high-speed link from Berlin to Palermo, the Brenner Base Tunnel is
scheduled for completion in 2025. When completed, the 64 km-long tunnel will link
northern Italy with the Austrian city of Innsbruck and will enormously improve rail freight
transport, especially to Italy. In total, 40% of the project costs amounting to EUR 9bn are
being financed by the EU, with equal parts also borne by Austria and Italy.
Five security types represent
the Italian product range:
Italy remains the biggest issuer in the eurozone. Securities divided into five categories
are issues on a regular basis by the Finance Ministry. In the short-term range there are
two different coupon-free instruments, differing primarily in their maturities: Buoni Ordinari del Tesoro (BOT) cover the maturity range below one year. Certificati del Tesoro
Zero Coupon (CTZ) are available in the two-year maturity range. In the medium to longterm investment spectrum (three years and more), the Italian Finance Ministry offers
Buoni Poliennali del Tesoro (BTP). There are also Certificati di Credito del Tesoro
(CCT), which are basically designed as FRN (reset index: 6M BOT yield) with a sevenyear maturity. Since 2010, CCTeu (Certificati di Credito del Tesoro eu) with five-year
maturity have come to the forefront, linked to 6M-Euribor. Auctions are conducted by
Banca d’Italia on behalf of the Treasury and announced in the Auction Calendar.
BOT
CTZ
CCT
BTP
BTP€is
Downgrade for Italy – S&P
cuts credit rating
At the end of 2014 the rating agency S&P delivered a blow to the government led by
Matteo Renzi by downgrading Italy's credit rating from "BBB" to "BBB-". This means that
the country has reached the last level to be considered as investment grade. Any further
downgrade would have severe consequences for the country, since the highly indebted
state would have to refinance at even higher cost. S&P believes that Italy can expect
weak economic performance in the next few years. The outlook is nonetheless rated as
stable. In other words, no further downgrade is expected for the time being.
Italy takes top place for
government debt and issue
volume
Italy usually issues around EUR 30bn per month unabated, of which half consists of
short-dated securities alone. Overall, medium and long-term fixed-interest BTP account
for about two thirds of the total issue volume. Recently, the conditions for issuing Italian
government bonds have steadily improved. For example, ten-year BTP were yielding
below 3% on newly issued bonds for the first time ever in May 2014. At the start of December they were no longer even able to hold the 2% mark. Due to the ECB's bond
purchase programme, the yield in the 10-year range fell to the historically low level of
1.03%. The gap with Bunds was seldom less than 100 basis points.
EUR bonds Italy (EURbn) – Maturity profile
Ratings Overview
400
LT
Outlook
Fitch
BBB+
Stable
Moody’s
Baa2
Stable
BBB-u
Stable
350
Last updated: 20 August 2015
Amount Outstanding (EURbn)
S&P
300
250
200
150
100
50
0
ITALY
ICTZ - CTZ
BOTS - BOT
CCTS - CCT
CCTS - BTP
BTPS - CCTeu
BTPS - BTP€i
BTPS - BTP Italia
BTPS - BTP
2015
15.5
63.3
25.0
2016
3.0
26.2
70.4
13.9
0.0
2017
0.4
15.7
2018
2.0
2019
2.9
2020
3.2
31.0
27.6
12.7
13.4
9.1
27.0
100.3
13.8
39.3
108.5
10.8
17.3
2021
1.4
2022
0.5
2023
2024
3.4
17.0
9.4
58.2
10.6
2025
0.2
15.1
20.6
31.8
117.8
124.0
Source: Bloomberg, NORD/LB Fixed Income Research
16.7
7.5
84.7
>2025
18.9
113.5
79.4
63.9
26.0
30.1
47.7
266.3
Maturity
3Y
5Y
7Y
10Y
15, 30Y
Security
BTP; BTPS
BTP; BTPS
BTP; BTPS
BTP; BTPS
BTP; BTPS
Security
BOT; BOTS
BOT; BOTS
BOT; BOTS
CCT
Issuance
mid-month
month-end
mid-month
month-end
occasionally
Coupon type
zero
zero
zero
Cpn frequency
discounted
discounted
discounted
Issuance
occasionally
month-end
mid-month
Day count
act/365
Coupon type
zero
Cpn frequency
discounted
Issuance
month-end
CTZ are also included in the short-term maturity range and are placed with a maturity of
24 months. In principle the product description from the Italian Treasury leaves scope for
flexible structuring of maturities. This option is not used at present. Four CTZ with a total
volume of EUR 54.5bn are currently available on the secondary market. The largest
single bond is currently ICTZ 0 12/31/15, with a volume of EUR 15.5bn. CTZ are issued
at the same time as BTP€i and have therefore been announced jointly since 2012
(BTP€I and CTZ Joint Announcements).
Security
CCTeu; CCTS
Day count
act/360
Coupon type
FRN (EUR006M)
Cpn frequency
semi-annual
Issuance
mid-month
CCTeu have been coming to the fore since 2010. In this case, 6M-Euribor (Bloomberg:
EUR006M) acts as reset index and a maturity of 5 Y is normal. As with CTZ, CCTeu
usually also have the option of adopting other maturities. Coupon fixing takes place
every six months. Five of these bonds are available at present, together representing
EUR 63.6bn. At around EUR 15.0bn, CCTS 0 12/15/15 is the biggest single bond.
CCTeu
Maturity
7Y
7Y
Day count
act/360
act/360
act/360
Security
CTZ; ICTZ
CTZ
Maturity
5Y
Cpn frequency
semi-annual
semi-annual
semi-annual
semi-annual
semi-annual
BOT generally run for six or twelve months, although the Italian tesoro does indicate that
they can also be scheduled with a three-month maturity or flexibly (BOT flessibili) between 1 and 12 months. The 6M and 12M maturities are issued at month-end and midmonth, respectively, while 3M and flexible maturities are only issued as required. 19
BOT (EUR 126.9bn) are placed at present. New issues are announced on the website
(BOT Announcements).
BOT
Maturity
24m
Coupon type
fix
fix
fix
fix
fix
At EUR 1,445.5bn (82 bonds), fixed-interest BTP account for the majority of all bonds
issued by the Italian Treasury. BTP are issued as medium to long-term fixed-interest
bonds with maturities of 3, 5, 7, 10, 15 and 30 years. The auctions for 3, 7, 15 and 30 Y
BTP are held in the second half of each calendar month. 5 and 10 Y maturities are auctioned in the last week of each month. The 7 Y maturity was only added to the range of
maturities in October 2013. Since 1998 it has been possible for BTP to be "stripped".
The paper comprising the last coupon and principal is called hybrid strip. New issues are
announced as Medium and long-term announcements on the website.
BTP
Maturity
3m or flexibly
6m
12m
Day count
act/act
act/act
act/act
act/act
act/act
Security
CCT; CCTS
CCT; CCTS
Day count
act/act
act/act
Coupon type
fix
FRN (GBOTG6M)
Cpn frequency
semi-annual
semi-annual
Issuance
occasionally
monthly
CCT (CCTS) have been representing the medium maturities segment since 1991. CCT
are only issued with a maturity of 7 years and are basically floaters, whose performance
is based on 6M BOT yield (Bloomberg: GBOTG6M). CCT were originally also placed
with maturities of two or ten years. There are currently six CCT, totalling EUR 73.6bn.
The only CCT with a fixed coupon is CCTS 3 12/01/16 (EUR 14.6m). Issues have shifted to CCTeu since 2010.
Maturity
5, 10, 15, 30Y
4Y
Security
BTP€i; BTPS
BTP Italia; BTPS
Inflation-indexed bonds:
BTP€i
BTP Italia
Maturity
various
Coupon type
I/L (CPTFEMU)
I/L (ITCPIUNR)
Cpn frequency
semi-annual
semi-annual
Issuance
month-end
twice a month
BTP€i are issued with maturities of 5, 10, 15 and 30 years. Their performance is linked
to the harmonised consumer price index ex tobacco for the Eurozone (HCPI ex tobacco;
Bloomberg: CPTFEMU). Apart from the three-year term, BTP€i thus replicate the maturities range of normal BTP. EUR 128.2bn (11 bonds) are issued at present. BTP€i can
also be "stripped". BTP Italia are designed as retail bonds with a maturity of four years,
in which the Italian inflation rate ex tobacco (Bloomberg: ITCPIUNR) acts as reference
index. BTP Italia bonds (at present: EUR 86.9bn; six bonds) should generally be regarded as an alternative to BTP€i. While new issues of BTP€i are announced jointly with
CTZ (BTP€I and CTZ Joint Announcements), BTP Italia bonds have their own link (BTP
Italia Announcements) since they appear less often on the market.
Security
ITALY
Italy Government
International Bond (ITALY)
Day count
act/act
act/act
Day count
various
Coupon type
various
Cpn frequency
various
Issuance
occasionally
Italy Government International Bonds (ITALY) are EMTN and are issued both in the
European single currency and in foreign currencies. In addition, these EMTN can also be
structured freely with regard to coupon type. As at the mid-August the Italian Treasury
had issued a total volume of EUR 51.4bn, of which EUR 35.9bn was accounted for by
euro-denominated bonds. The biggest single issue is ITALY ITALY 5 1/8 07/31/24 (EUR
3.25bn). The equivalent of EUR 11.2bn is denominated in USD (only fixed coupons).
The volume in GBP or Japanese yen (JPY) is much less. Further information on issues
on international markets is available on the website.
5
5
4
4
3
3
2
2
1
1
0
0
-1
06.2014
08.2014
2 Yr
10.2014
4 Yr
12.2014
5 Yr
02.2015
7 Yr
04.2015
10 Yr
06.2015
Yield (%)
Yield (%)
Italian Govt Bonds –Yields (%)
-1
08.2015
30 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
In terms of government debt,
Italy remains No. 2 behind
Greece
Following a further rise in Italian public debt to 132.1% of GDP in 2014 (2013: 128.5%),
only Greece has even worse figures in the eurozone. The budget balance fell slightly by
0.1% to -3.0% of GDP, positioning it close to the level of the previous year.
In 2014, total revenue rose by about EUR 4.7bn to EUR 777.2bn. This was mainly due
to taxes on production and imports. They increased from EUR 238.9bn (2013) to EUR
247.0bn and are also the country's biggest source of revenue. Social contributions also
rose year-on-year, to EUR 216.4bn in 2014. Taxes on income and wealth etc, which still
accounted for EUR 240.9bn in 2013, fell to EUR 237.5bn last year. Other revenue posted a small drop, down to EUR 76.3bn in 2014.
Revenue rose by around
0.6%
Gross debt vs. budget balance (%)
Total revenue vs. total expenditure (EURbn)
140
0
900
800
120
-1
700
100
-2
600
500
80
-3
400
60
300
-4
40
200
-5
20
100
0
0
-6
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
2013
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2014
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
Expenditure at new record
level
On the expenditure side, EUR 826.3bn (2013: EUR 820.0bn) was reported in 2014. This
represents a new peak in the period covered by the review. Benefits and social transfers
rose around 2.4% to EUR 372.0bn. In the public sector, expenditure on compensation of
employees went down once again, from EUR 164.9bn (2013) to EUR 163.9bn. Due to
the improved conditions on the capital market, expenditure on payable interest fell from
EUR 77.9bn (2013) to EUR 75.2bn. This item still made up around 9% of all expenditure.
Other expenditure totalled EUR 192.8bn in 2014, which remained slightly below the
previous year's level (EUR 194.7bn).
Matteo Renzi is proposing a
"Marshall Plan for the south"
The Italian government is proposing a large-scale investment programme to boost the
country's competitiveness compared to the other EU member states. The state intends
to invest some EUR 7bn in expanding the broadband network. Prime minister Renzi has
ambitious goals in this respect, with the intention of developing the country into one of
the leaders in Europe. Major infrastructure projects are planned to revitalise the economy in southern Italy. With the aid of EU regional development funds, around EUR 30bn
is earmarked for modernising the infrastructure network. One of these projects involves
extending the high-speed rail line from Naples to Sicily. The government is also prioritising projects to prevent earthquake damage and flooding. Italy's prime minister is also
proposing tax relief for the coming years. In 2016 the property tax on taxpayers' main
residence is scheduled to be cut. Renzi also announced a cut in corporate taxes starting
from 2017 and income tax from 2018. By loosening the austerity programme in this way,
the government is aiming to stimulate the economy and reduce the high level of unemployment.
Comment – Public finances
In the wake of the financial and government debt crisis, the Italian economy lost a large
part of its international competitiveness. In Matteo Renzi, who has held power since
February 2014, Italy seems to found a man of action, someone who wishes to release
the country from economic stagnation – and is capable of doing so. In successfully
promulgating an amendment to electoral law, the prime minister has already managed to
implement a major reform project. The government is also pressing on with privatisation.
Proposals put forward would float the Italian postal service on the stock market in the
autumn of this year. This could be followed by partial privatisation of the railways next
year. Implementing these projects would bring further relief to the state coffers and help
to boost the urgently needed reduction in debt. Public debt increased further despite a
slight rise in revenue. Italy has the second-highest debt ratio after Greece. Problematic
aspects continue to include the economic discrepancy between northern and southern
Italy, the battle against tax evasion and corruption, and overall unemployment of around
12.5% (although this rises sustantially to 44% for under-25s). As in most EU countries,
Italy also needs wide-ranging reform of the pension system due to demographic trends.
Another negative factor with an impact on refinancing costs is the downgrade by the
rating agency Standard & Poor’s that Italians had to accept at the end of 2014. The proposed investment programme and tax relief could bring new momentum to Italy's economy. It remains to be seen how sustainable this strategy actually is, in view of the very
high debt ratio. Continuing high levels of expenditure and – at least from a short to medium-term viewpoint – potentially lower revenue do not necessarily lead to an improvement in public debt.
Strengths & opportunities
Weaknesses & risks
+
Internationally recognised industry clusters
–
Exports very much focussed on Eurozone
+
Specific development of southern regions
–
Economic North-South divide
+
Relatively large reserves for privatisations
–
High budget deficit and high interest burden
+
Reform efforts by the government
–
Reform bottleneck, corruption and shadow economy
+
Very high liquidity of bonds
–
High (youth) unemployment
–
BBB- credit rating
Source: NORD/LB Fixed Income Research
Comment – Bond market
On account of its international significance and professional presence on the bond market, Italy is a candidate for the AA universe, although currently it only represents medium-grade quality (Moody’s). Due to ECB liquidity injections, domestic banks have always
been able to perform their classic role as the demand side for Italy's government bonds.
In view of the payable interest of almost 10% of all expenditure, continuance of the low
interest rate environment is of key importance. Extensive new issues and repayments
are still on the agenda until the end of 2015. For this reason, investors are inevitably
faced with quite important decisions on reinvestment. Italian BTP are among the top
performers in the eurozone. Italian government bonds remain attractive, despite generally falling risk premiums compared to alternatives with higher credit ratings. Investors
should nonetheless be clear that any reduction in debt as required by the European
Commission will take a number of years.
Spain
Catalan independence movement is causing unrest
Spain is divided into seven
NUTS-1 regions and 19
NUTS-2 regions:
Spain is the fourth-largest economy in the eurozone in terms of GDP (2014: EUR
1,058.5bn), behind Germany, France and Italy. Last year saw an increase in Spain's
GDP for the first time after the economy had produced negative growth in the previous
three years. In 2015, too, the government expects positive growth of 2.5%. When the
real estate bubble burst (2007), the savings bank sector in particular encountered difficulties. In mid-2012, Spain submitted an application to the EU with the aim of ensuring
recapitalisation of distressed banks. The credit line granted for bailing out the banks
amounted to EUR 100bn, of which the country has used around EUR 40bn. Although
repayment was not scheduled until the next decade, the Spaniards are already starting
to make early repayments. This is possible on account of the improvement in the country's economic situation. Catalonia (GDP share: 18.6%), Madrid (GDP share: 18.0%)
and Andalusia (GDP share: 13.5%) are the most important economic regions in Spain,
generating around half of GDP. Spain is the second-biggest car manufacturer in the EU
after Germany, and is even the leader for commercial vehicles. The automotive industry
is based chiefly in Catalonia (Martorell, Barcelona), Navarre (Pamplona), Galicia (Vigo)
and Madrid. Although the Madrid region has quite large manufacturing capacity, its GDP
is produced principally by the service sector. The south of Spain is dominated by agriculture (especially citrus fruits) and tourism. No other country in the eurozone has a positive
balance for tourism (invisible trade balance) that is anywhere near as high as Spain's
(2014: EUR 33.3bn). The most important trading partner is traditionally France, which is
Spain's biggest export destination (16.6%). Like most eurozone countries, Spain is heavily dependent on imports of fossil fuels. However, unlike western and central European
countries, Spain gets neither gas nor oil from Russia, but primarily from Algeria and
France. With the expansion of the Trans-Saharan Pipeline, which connects Nigeria with
the Algerian pipeline hub at Hassi R'Mel, Spain may help other EU states to become
more independent of Russian imports in assuming a role as a transit country.
[ES1] Noroeste:
[ES11] Galicia
[ES12] Principado de Asturias
[ES13] Cantabria
[ES2] Noreste:
[ES21] País Vasco
[ES22] Comunidad Foral de Navarra
[ES23] La Rioja
[ES24] Aragón
[ES3] Comunidad de Madrid:
[ES30] Comunidad de Madrid
[ES4] Centro (E):
[ES41] Castilla y León
[ES42] Castilla-La Mancha
[ES43] Extremadura
[ES5] Este:
[ES51] Cataluña
[ES52] Comunidad Valenciana
[ES53] Illes Balears
[ES6] Sur:
[ES61] Andalucía
[ES62] Región de Murcia
[ES63] Ciudad Autónoma de Ceuta
[ES64] Ciudad Autónoma de Melilla
[ES7] Canarias:
[ES70] Canarias
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Trade, transport, accomodation, food serv.
2 Public admin, educ., human health, social
3 Industry (except construction)
4 Real estate activities
5 Construction
6 Professional, scientific, technical activities
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
46.5
505,970
1058.5
Value
25.9
18.3
17.5
8.4
7.8
22.1
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Road vehicles (including air-cushion vehicles)
10.8%
16.0%
1 France
16.5%
Food, beverages and tobacco
9.0%
14.2%
2 Germany
10.9%
Petroleum, petroleum products and related materials 5.5%
8.6%
3 Portugal
7.7%
Medicinal and pharmaceutical products
6.1%
4.2%
4 Italy
7.3%
Crude materials
3.0%
4.1%
5 United Kingdom
7.2%
Articles of apparel and clothing accessories
2.1%
3.9%
6 USA
4.5%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 3.8%
parts thereof7(including
Netherlands
non-electrical counterparts, n.e.s.,
3.2%
of electrical household-type
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
3.4%
n.e.s.
8 Morocco
2.5%
Iron and steel
2.9%
3.4%
9 Belgium
2.4%
Manufactures of metals, n.e.s.
3.1%
3.2%
10 Turkey
2.1%
Value
7.97
-11.635
40.87
33.257
1.627
5.987
-25.285
9.89
50.335
-88.494
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
16.0%
1 Germany
13.2%
Road vehicles (including air-cushion vehicles)
8.0%
10.9%
2 France
11.8%
Food, beverages and tobacco
8.6%
9.4%
3 China
6.1%
Crude materials
4.3%
5.0%
4 Italy
6.1%
Articles of apparel and clothing accessories
3.2%
4.8%
5 Netherlands
4.8%
Medicinal and pharmaceutical products
4.9%
4.4%
6 United Kingdom
4.4%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 4.0%
parts thereof7(including
Portugal non-electrical counterparts, n.e.s.,
3.8%
of electrical household-type
Gas natural and manufactured
3.0%
3.9%
8 Algeria
3.4%
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
3.3%
n.e.s.
9 Belgium
3.2%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
3.0%
8
10 USA
3.2%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Seven provincial capitals will
be connected to the AVE
network
Europe's largest solar power station (Plataforma Solar de Alméria) and the biggest wind
farm (Tarifa) are located in Andalusia or off its coast. Major Spanish ports are La Coruña
and Bilbao in the north, Valencia and Barcelona in the east and Cádiz and Malaga in the
south. The road system is well-developed. High-speed trains (Alta Velocidad Española,
AVE) connect the major cities. Seven provincial capitals, including Zamora, León, Burgos, Palencia and Granada, are to be connected with high-speed rail lines by the end of
2015. In the following year the lines are to be extended in the north-west Spanish provinces of Galicia and Asturias, and along the Mediterranean coast. Spain would then
have a 4,000-kilometre high-speed rail network. From a global perspective, this would
be the second-biggest high-speed network after China.
Spain focusses on two types
of security
Since the start of the 1980s, Spain has expanded its sources of refinancing and improved its risk diversification. Debt management is the responsibility of the General
Secretariat of the Treasury and Financial Policy, Tesoro. Iberclear was established in
1987 to settle securities transactions. Spain is currently represented on the bond market
with a volume around EUR EUR 750bn, consisting mainly of Letras (money market),
Bonos (maturity up to 5 Y) and Obligaciónes (maturity from 10 Y). According to the official funding programme, a net funding volume of EUR 55bn has been announced for
2015. Of this amount, EUR 50bn will have medium and long-term maturities and EUR
5bn will be issued as Letras. The gross funding volume is stated as EUR 239.4bn. The
issue yields on Spanish money market and capital market paper is meanwhile falling
further. The Tesoro's website provides an Overview of all instruments. Up-do-date information is also provided on the Investor presentation (July 2015).The Banco de Espana also provides statistics and fundamental data. The Spanish government provides
information on public finances.
Fitch and S&P confirm their
ratings for Spain
In 2014 the rating agencies Moody’s and S&P raised Spain's credit rating from Baa3 to
Baa2 and from BBB- to BBB, respectively, averting a possible loss of investment-grade
status. Fitch and S&P confirmed their ratings in the spring of this year. The outlook as
assessed by Fitch remains "stable". Accordingly, a change to the rating is not expected
for the time being. Standard & Poor's also retained the rating and outlook. The latest
reforms enable the country to benefit from the drop in oil prices, a weak euro and the
ECB's monetary policy, according to the rating agency.
EUR bonds Spain (EURbn) – Maturity profile
Ratings Overview
LT
160
Outlook
Fitch
BBB+
Stable
Moody’s
Baa2
Positive
S&P
BBB
Stable
Last updated: 20 August 2015
Amount Outstanding (EURbn)
140
120
100
80
60
40
20
0
SPAIN
SPGBEI
SGLT
SPGB
2015
2.8
2016
5.5
2017
2.9
2018
0.9
2019
2020
2021
2022
0.3
2023
6.9
26.7
14.6
50.0
80.1
83.8
69.9
64.3
2024
2025
>2025
0.3
4.1
48.2
128.7
7.4
68.8
24.0
22.9
37.8
60.9
Source: Bloomberg, NORD/LB Fixed Income Research
Privatisation project fills
Spain's state coffers
The partial privatisation of the Spanish airport operator Aena developed into a success
for the Spanish government at the start of 2015. Spain received around EUR 4bn for its
empty coffers by selling the shares. Initially, 44.6% of Aena stock was sold, with demand
coming mainly from institutional investors. Depending on further demand, the sale of
shares could be extended to 49%. This was the biggest privatisation of a financially
distressed eurozone country in more than ten years. Aena holds a stake in 46 airports
within Spain and more than 20 airports abroad. According to its own information, it handles 187 million passengers per year.
Trend-setting political
decisions are pending in
Spain
Maturity
2, 3, 5Y
10, 15, 30Y
Security
Bonos; SPGB
Oblig.; SPGB
Bonos y Obligaciónes del
Estado
Maturity
3, 6, 9, 12m
2015 is the "super election year" for Spaniards. In March and May some regional parliaments were elected and – also in May – all mayors were up for election in country-wide
municipality elections. The remaining regional elections and the parliamentary elections
for the national congress will be held in the autumn. The established parties (conservatives and socialists) had suffered losses in the regional elections in the early part of the
year. The current government led by prime minister Mariano Rajoy (Partido Popular) is
under pressure due to various corruption scandals and its austerity policy. As a result,
the race should be between conservatives, socialists and the Spanish protest party,
Podemos, although the latter has fallen back in the latest polls. The independence
movement in Catalonia is also a controversial matter. At the end of 2014 a referendum
was held, with the outcome in favour of Catalan independence. Following legal action by
the central state, the referendum was declared to be illegal by the Spanish constitutional
court. Bearing especially in mind the high economic importance of Catalonia for Spain as
a whole, the current government would like to prevent a split at any price. It remains to
be seen how this "never-ending story" will develop, since a definitive separation would
probably have severe economic consequences for the state.
Day count
act/act
act/act
Coupon type
fix
fix
Cpn frequency
annual
annual
Issuance
monthly
monthly
Bonos y Obligaciónes del Estado (SPGB) is the general term for government bonds
covering the investment spectrum above a maturity of two years and offering annual
coupon payments. At present, around EUR 700.5bn (41 bonds) are issued. Bonos and
Obligaciónes only differ with regard to their maturities. In the short to medium range of
maturities, the Spanish finance ministry issues bonos with maturities of 2, 3 and 5 years.
Obligaciónes are usually issued for 10, 15 and 30 years. Exceptions prove the rule (e.g.
SPGB 4.7 07/30/41 and SPGB 4.9 07/30/40). On the market itself and in the Issue Calendar published by the Spanish Treasury, Bonos y Obligaciónes are generally not listed
separately. Stripping and reconstruction have been possible since July 1997.
Security
Letras; SGLT
Day count
act/360
Coupon type
zero
Cpn frequency
discounted
Issuance
once a month
Letras del Tesoro (SGLT) were first issued in 1987. They are short-term discounted
treasury bills and are placed by auction with maturities of 3, 6, 9, 12 months. Letras with
a maturity of 18 months are no longer issued. They have been replaced by bonds with a
term of nine months. 13 Letras with a total volume of EUR 80.6bn are currently available.
Letras del Tesoro
5
5
4
4
3
3
2
2
1
1
0
0
-1
06.2014
08.2014
2 Yr
10.2014
4 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
12.2014
5 Yr
02.2015
7 Yr
04.2015
10 Yr
-1
08.2015
06.2015
30 Yr
Yield (%)
Yield (%)
Spanish Govt Bonds –Yields (%)
Maturity
25Y (EUR)
various (FX)
Security
SPAIN
SPAIN
Day count
act/act
various
Cpn frequency
annual
various
Issuance
6/5/2011
occasionally
Spain International Govt Bonds comprise three euro-denominated bonds (e.g. SPAIN
5.6 05/06/36, with a volume of EUR 335m). Although foreign currency bonds may, in
principle, also be issued in this programme, the Spanish Treasury makes hardly any use
of this option. One USD bond accounts for about EUR 1.8bn, another one around EUR
270m. Other currencies are the yen (EUR 433m; three bonds) and the pound sterling
(EUR 280.7bn; SPAIN 5 ¼ 04/06/29). More information about non-euro debt is available
on the Tesoro website.
Spain Govt International
Bond (SPAIN)
Maturity
10Y
Coupon type
fix
various
Security
BONO€i; SGBEI
Day count
act/act
Coupon type
I/L (CPTFEMU)
Cpn frequency
annual
Issuance
20/5/2014
Bonos y Obligaciones del
Estado indexados a la
inflación europea (SPGBEI)
On 20 May 2014 the Tesoro issued a new inflation-indexed government bond (SPGBEI
1.8 11/30/24), whose performance is pegged to the harmonised European consumer
price index ex tobacco (CPTFEMU).
EU raises growth forecast –
unemployment rate still
falling
A budget balance of -5.8% of GDP (2013: -6.8%) and public debt of 97.7% of GDP
(2013: 92.1%) remain heavy burdens for Spain. The budget balance has been on the
road to recovery since the Budget Stability Law was passed on 12 April 2012, requiring
the central state and the autonomous regions and municipalities to have balanced
budgets starting from 2020. On the other hand, sovereign debt has been rising steadily
since 2007. The European Commission has raised its forecasts of Spanish economic
growth for 2015 to 2.3% and for 2016 to 2.5%. It foresees an improvement in all relevant
indicators. The unemployment rate is also at its lowest level in almost five years, although it is still around 22%.
Social security contributions
rose for the first time since
2008
In 2014, total Spanish revenue rose to EUR 399.7bn (2013: EUR 393.5bn). While social
contributions did not rise after 2008 due to the upheaval on the labour market, moderate
growth was again achieved in 2014. They rose from EUR 128.2bn in 2013 to EUR
129.9bn and remain the biggest item ahead of taxes on production and imports, which
increased to EUR 118.4bn compared to 2013 (EUR 115.4bn). Spain posted constant
revenue for taxes on income and wealth, which rose minimally from EUR 105.1bn
(2013) to EUR 105.6bn. The record level in the period covered by the review (2007:
EUR 137.6bn) was set shortly before the property bubble burst. Other revenue amounted to EUR 45.8bn in 2014, a new peak in the period under review.
Gross debt vs. budget balance (%)
Total revenue vs. total expenditure (EURbn)
100
4
90
2
600
500
80
0
70
400
-2
60
300
50
-4
40
-6
200
30
-8
100
20
-10
10
0
0
-12
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
2013
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
2014
Total expenditure fell by
EUR 3.7bn
In 2014, Spain managed to reduce total expenditure to EUR 461.1bn (2013: EUR
464.8bn), following the major cuts made in the previous year. This was primarily due to
the asset transfers item, which went down by around EUR 2bn to EUR 8.1bn. Social
benefits and social transfers, the most important item in total expenditure accounting for
around 43%, managed to maintain practically the previous year's level. In 2014 this item
made up EUR 198.6bn. Compensation of employees also stagnated at the 2013 level of
EUR 114.5bn. Despite improving conditions on the capital market, payable interest nevertheless rose minimally to EUR 34.5bn (2013: EUR 34.2bn), accounting for 7.5% of
total expenditure. Other expenditure totalled EUR 105.4bn in 2014.
Comment – Public finances
The signs of ailment in the fourth-largest economy in the eurozone are waning. Following Spain's return to positive GDP growth in 2014, the country posted its highest economic growth since the start of 2007 in the second quarter of 2015. The European
Commission increased its growth forecasts for the current year and next. This is directly
related to an improved situation on the labour market, higher GDP growth and the austerity programme. Continuing low prices for oil and intervention by the ECB could deliver
additional impetus for personal spending and investment, resulting in even stronger
growth. Another indication of consolidation comes from the ratings confirmed by Fitch
and S&P in the spring, which also kept the outlook as "stable". Partial privatisation of the
state-owned airport operator Aena flushed about EUR 4bn into the state's coffers, helping to further correct the budget balance. At -5.8% of GDP combined with high public
debt, this is a heavy burden for the country. Despite an improvement in the unemployment rate to its current level of around 22%, it is clear that additional measures are necessary to stabilise Spain further and make it competitive over the long term. The strained
situation on the labour market is also impacting on the expenditure side of the state's
finances. The disproportionately high interest payments are putting additional pressure
on the state coffers. Spain is traditionally strong in the export of agricultural products and
foodstuffs. Going back a long way, the Spanish economy can also rely on revenue from
tourism. For years, the country has been unchallenged as having the highest positive
balance of all countries in the eurozone in this respect. The construction industry remains a problem area. The forthcoming parliamentary elections and the progress of the
independence movement in Catalonia will be trend-setters for the future of Spain. If,
after the municipal and regional elections at the start of the year, there is also a slide to
the left at national level, further limits would certainly be set on the austerity programme.
Any split with Catalonia would have a significant impact on Spain's economy, since this
region is one of the most important in the country.
Strengths & opportunities
Weaknesses & risks
+
Good infrastructure
–
Exports very much focussed on eurozone
+
Budget consolidation
–
High level of national debt
+
Tourism and export sector (especially cars)
stable
–
High unemployment, emigration of qualified
personnel abroad
+
Above-average economic forecasts
–
Political instability
+
Reform of tax system
–
High interest burden for issuer
Source: NORD/LB Fixed Income Research
Comment – Bond market
Even as recently as the start of 2013 it was questionable whether Spanish government
bonds would retain their investment-grade status. This risk looks to have been averted
by now. In recent months, Spain used the favourable timeframes for refinancing its public debt. It will continue its policy of supplementing the volumes placed towards the short
and medium end of the curve in previous years by increased volumes issued for longer
maturities. By doing so, Spain will gain somewhat more breathing space with regard to
its future repayment obligations. Investors who can also cope with temporary setbacks
continue to see Spanish government bonds as high-yield investments. For the issuer
itself, the payable interest has become a major burden for Spain since the start of the
financial crisis.
Netherlands
Capping natural gas production
The Netherlands are divided
into four NUTS 1 regions and
twelve NUTS 2 regions:
With GDP of EUR 662.8bn in 2014, the Dutch share of the Eurozone's economic output
is around 6.6%. Accounting for almost 74% of GDP, the services sector is the most
important. This is followed by industry at around 24%, with agriculture and fisheries
bringing up the rear at nearly 2% of GDP. Looking at the twelve NUTS 2 regions, it is
clear that South Holland [NL33; share of GDP: 20.9%] has the biggest share of GDP
ahead of North Holland [NL32; share of GDP: 18.2%], North Brabant [NL41; share of
GDP: 14.9%] and Gelderland [NL22; share of GDP:10.1%]. The Netherlands is the fifth
largest export nation in the world after the People's Republic of China, the USA, Germany and Japan. Its main trading partner is Germany. As a result of its central position in
Europe and traditionally close links with the European and intercontinental markets, the
Netherlands is a logistics hub for European and global goods traffic. With cargo handling
of around 440 million t (2014), Rotterdam is the biggest port in Europe and the only nonAsian port in the top ten largest ports in the world. The port expects further growth and is
continually investing to expand capacity. In terms of passenger numbers, AmsterdamSchiphol airport ranks in 14th place worldwide and is the fourth largest airport in Europe
after London-Heathrow, Paris-Charles de Gaulle and Frankfurt/Main. Air freight totalled
some 1.6 million t in 2014. Between now and 2028, the Dutch government plans to invest around EUR 82bn in the country's infrastructure, which is already modern and of a
good standard. According to Standard & Poor’s, around EUR 6bn a year should deliver
an economic stimulus and it is possible that the economy will generate above-average
profitability. The investment is focused on road building and the rail network. A budget of
EUR 7.3bn is available for 2015.
[NL1] Noord-Nederland:
[NL11] Groningen
[NL12] Friesland (NL)
[NL13] Drenthe
[NL2] Oost-Nederland:
[NL21] Overijssel
[NL22] Gelderland
[NL23] Flevoland
[NL3] West-Nederland:
[NL31] Utrecht
[NL32] Noord-Holland
[NL33] Zuid-Holland
[NL34] Zeeland
[NL4] Zuid-Nederland:
[NL41] Noord-Brabant
[NL42] Limburg (NL)
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Public admin, educ., human health, social
2 Industry (except construction)
3 Trade, transport, accomodation, food serv.
4 Professional, scientific, technical activities
5 Financial and insurance activities
6 Real estate activities
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
16.8
41,540
662.8
Value
22.5
19.7
18.6
10.9
8.7
19.5
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Petroleum, petroleum products and related materials 5.5%
12.8%
1 Germany
23.9%
Food, beverages and tobacco
9.0%
12.7%
2 Belgium
13.2%
Office machines and automatic data processing machines
2.1%
7.0%
3 United Kingdom
8.8%
Telecommunications and sound-recording and reproducing
2.5%
apparatus6.3%
and equipment
4 France
8.5%
Crude materials
3.0%
5.2%
5 USA
4.0%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
4.3%
8
6 Italy
4.0%
Medicinal and pharmaceutical products
6.1%
4.1%
7 Spain
3.0%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 4.0%
parts thereof8(including
Sweden non-electrical counterparts, n.e.s.,
2.3%
of electrical household-type
CONFIDENTIAL TRADE OF GROUP 39 AND/OR ESTIMATIONS
0.6%
3.7%
9 Poland
2.2%
Organic chemicals
3.0%
3.5%
10 China
1.8%
Value
65.60
50.157
13.802
-3.697
8.783
8.717
-57.002
-7.288
-41.353
-22.485
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
18.9%
1 Germany
14.9%
Food, beverages and tobacco
8.6%
9.4%
2 China
13.6%
Office machines and automatic data processing machines
2.9%
6.8%
3 Belgium
8.7%
Telecommunications and sound-recording and reproducing
3.4%
apparatus6.5%
and equipment
4 USA
6.6%
Crude materials
4.3%
4.8%
5 United Kingdom
5.9%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
4.6%
8
6 Russia
5.5%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 4.4%
parts thereof7(including
France non-electrical counterparts, n.e.s.,
4.1%
of electrical household-type
Road vehicles (including air-cushion vehicles)
8.0%
3.9%
8 Norway
3.1%
Medicinal and pharmaceutical products
4.9%
3.6%
9 Japan
2.2%
Organic chemicals
3.0%
3.2%
10 Italy
1.9%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Earthquake risk –
Netherlands caps natural
gas production
The Dutch will further cap their natural gas production due to a large number of small
earthquakes in the Groningen production region. The total production volume for 2015 is
set to be 30 billion cubic metres – around 25% less than initially planned. Gas production had already been reduced by almost 10% at the start of the year. People and politicians in the province, which is on the border with Germany, had called for a steep cut in
production. The Dutch Ministry of Economics, headed by Henk Kamp, announced that
supplies for the Netherlands and deliveries to Germany, France and Belgium were ensured. The Dutch are the largest producers of natural gas in Europe after Norway. Experts believe there is a risk of medium-strength earthquakes if production is not capped.
According to dpa, natural gas production is set to be cut considerably as of 2020 and
buyer countries (e.g. Germany) in particular will have to find new partners for this resource in the future.
Netherlands slowly
recovering from property
crisis
Since the burst property bubble caused its German neighbour to lose its top rating from
Standard & Poor’s at the end of 2013, there has been a successive recovery in the market. The price slide has halted, but development still varies considerably from region to
region. Overall, the first quarter of 2015 saw prices return to their 2007 level. The average house price amounted to EUR 224,000, a rise of almost 4% on the previous year.
DSTA is the state's debt
management agency
The DSTA (Dutch State Treasury Agency) acts as the debt management body. The
primary focus of the DTSA is on the issue of two types of security. On the money market
there is the Schatkistpapier (Dutch Treasury Certificate; DTC), while Staatsobligaties
(Dutch State Loans; DSL) are issued on the capital market. As at the end of February,
the Dutch treasury reported a total volume of outstanding debt securities amounting to
EUR 349.2bn, of which EUR 16.8bn was attributable to DTC and EUR 322.6bn to DSL.
In addition to these standard securities, DSL in foreign currencies (EUR 5.3bn), private
loans (EUR 3.6bn) and other (EUR 0.9bn) round off the product range. Refinancing
requirements have increased steadily in recent years. In 2015, funding of EUR 94.8bn is
scheduled to be raised, of which EUR 48bn is attributable to capital market products.
Redemptions account for EUR 39.5bn. Detailed information on Outlook 2015 including
finance planning is available on the DSTA website.
EUR bonds Netherlands (EURbn) – Maturity profile
Ratings Overview
70
LT
Outlook
Fitch
AAA
Stable
Moody’s
Aaa
Stable
AA+u
Positive
S&P
Last updated: 20 August 2015
Amount Outstanding (EURbn)
60
50
40
30
20
10
0
DTB
NETHER
2015
14.4
2016
1.2
28.1
2017
2018
2019
2020
2021
2022
2023
2024
2025
>2025
44.9
40.2
29.4
30.4
16.5
15.3
29.9
15.3
11.5
61.2
Source: Bloomberg, NORD/LB Fixed Income Research
Standard &Poor's raises
prospect of top rating for
Netherlands
The Netherlands lost its top rating from S&P in 2013 but could regain it in the foreseeable future. On 22 May 2015, the rating agency raised its outlook for the second biggest
agricultural export nation to "positive" and its credit rating could be upgraded in the next
two years. The probability of this is given as one in three. The reason cited for the improved assessment was the country's economic recovery. Domestic demand is rising
and the situation in the labour market has continued to ease. S&P also noted the increased investment activity on the part of companies. The government headed by Prime
Minister Mark Rutte is expected to maintain its austerity policy.
Maturity
3m
6, 9, 12m
Security
DTC; DTB
DTC; DTB
Schatkistpapier Dutch Treasury Certificate
(DTC)
Maturity
3, 5, 10Y
20, 30Y
Day count
act/360
act/360
Cpn frequency
discounted
discounted
Issuance
twice a month
once a month
Dutch Treasury Certificates (DTC; Bloomberg: DTB) are the Dutch money market securities. Auctions are on the agenda twice a month (1st and 3rd Monday). There are two
significant factors of uncertainty for 2015 that could adversely affect money market volumes. One, the quantity of cash collateral has increased in 2014 as a result of lower
interest rates and the composition of the swap portfolio. Two, it remains difficult to predict the development of cash collateral in 2015. All DTC are announced in the quarterly
issuance calendar. There are currently five DTC, totalling around EUR 13.0bn.
Security
DSL; NETHER
DSL; NETHER
Staatsobligatie Dutch State Loan (DSL)
Coupon type
zero
zero
Day count
act/act
act/act
Coupon type
fix
fix
Cpn frequency
annual
annual
Issuance
1-3 times aYear
once in 5-6Years
In the medium and long-term segment, the Netherlands uses Staatsobligaties, known
internationally as Dutch State Loans (DSL; Bloomberg NETHER), for refinancing purposes. There are currently 32 instruments with a total volume of some EUR 336.2bn.
Auctions for DSL are announced in the quarterly issuance calendar. A three-year DSL
and 10-year DSL, both with a volume of EUR 15bn, are scheduled for 2015. In the case
of maturities up to and including 10 Y, the DSTA is required to raise the volumes to EUR
15bn within one year, for 30 Y DSL the target figure is EUR 10bn. The extremely long
maturities are only issued in a 5 to 6-year cycle. Stripping of DSL was introduced in
1999.
3
3
2
2
1
1
0
0
-1
06-2014
08-2014
2 Yr
10-2014
3 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
12-2014
5 Yr
02-2015
7 Yr
04-2015
-1
08-2015
06-2015
10 Yr
30 Yr
Yield (%)
Yield (%)
Dutch Govt Bonds –Yields (%)
CPB forecasting economic
growth
The Netherland's Central Planning Bureau (CPB) has forecast an upturn in the economic situation over the next few years. While the economy was still shrinking in 2013 with a
contraction of 0.7%, it grew by 0.9% in 2014. For the current year, the CPB is predicting
growth of 2.0%. GDP is set to rise by 2.1% in 2016.
Total revenue continued to
grow in 2014
In 2014, total revenue for the Netherlands amounted to EUR 290.4bn, up by around
EUR 4bn on 2013 (EUR 286.2bbn). Development in revenue from taxes on income and
wealth etc. was particularly pleasing, climbing from EUR 65.9bn (2013) to EUR 70.9bn
(2014). Taxes on production and imports also increased versus the previous year, advancing by around EUR 3.7bn to EUR 75.2bn. Social contributions recorded a moderate
rise and went up from EUR 100.8bn (2013) to EUR 101.7bn. Only other revenue registered a sharp fall, generating EUR 42.5bn in 2014 (2013: EUR 48.1bn).
Gross Debt vs. Budget Balance (% of GDP)
Total Revenue vs. Total Expenditure (EURbn)
100
1
350
0
300
90
80
-1
70
60
-2
250
200
50
150
-3
40
100
30
-4
20
50
-5
10
0
0
-6
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
Total expenditure at new
record level
2013
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2014
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
The Netherlands' total expenditure reached its lowest level for four years in 2013 (EUR
300.8bn), but rose again in 2014 to EUR 305.4bn. The biggest line item is benefits and
social transfers. These have risen continually in the period under review and hit a new
high of EUR 146.2bn in 2014. The steepest increase was recorded by other expenditure.
The figure reported by Eurostat for 2013 was just EUR 81.5bn compared with EUR
86.1bn for 2014. Despite slight fluctuations, compensation of employees has remained
constant since 2010. The costs here for last year stand at EUR 60.3bn. Payable interest
(2014: EUR 9.5bn) reduced in 2014 to around 3.1% of total expenditure. This is the
lowest it has been for 13 years and underscores the current phase of low interest rates
in Europe and favourable refinancing costs in the money and capital markets. Capital
transfers also continued to decline, falling from EUR 5.2bn in 2013 to EUR 3.3bn in
2014.
Comment – Public finances
The Netherlands is an export-oriented, service economy with strong international links.
We view the country's role as a hub in the Eurozone through the port of Rotterdam as
positive, and this is likely to ensure growth in revenue again in the line item taxes on
production and imports. Assuming that the growth rates forecast by the CPB materialise,
we see a rising trend on the revenue side. The government's investment programme in
particular suggests that the economy will continue to gain momentum. In the long term
however, the capping of natural gas production in the Groningen region will lead to a
decrease in exports of these products. Another positive factor is the planned reprivatisation of ABN AMRO, which was nationalised during the financial crisis. According to the
Dutch newspaper "De Telegraaf", the proceeds from the first tranche of EUR 3 - 4.5bn
could further reduce the country's debt mountain. On the negative side, the governing
parties in the Netherlands received a setback in March 2015. They suffered considerable
losses in the Dutch provincial elections in March 2015 and lost the majority in the first
chamber (comparable with Germany's Bundesrat) which could lead to a political stalemate. As before, there are risks in the real estate sector as well as in the pensions system and healthcare.
Strengths & opportunities
Weaknesses & risks
+
logistics hub in Europe
–
exports mainly to EU trading partners
+
broad range of import trading partners
–
costs of healthcare and pensions
+
above-average debt figures
–
heavily dependent on global market
+
balanced tax system
–
limited liquidity of DSL on secondary market
+
own energy resources (e.g. natural gas)
–
unstable real estate market
+
Infrastructure expansion
–
demographic change
Source: NORD/LB Fixed Income Research
Comment – Bond market
We consider Dutch government bonds a sound investment in the AAA segment, but one
that offers investors only a low yield. On the one hand, the Netherlands benefits from low
funding costs. On the other, a return of investors' risk appetite could push the relative
appeal of the Netherland's excellent rating into the background. After all three big rating
agencies revised the outlook for the Netherlands down to negative in 2013, S&P downgraded its rating to AA+u (pos.) on 29 November 2013.
Belgium
New government meets resistance to reform programme
Belgium is divided into three
NUTS-1 regions and eleven
NUTS-2 regions:
GDP of EUR 402.0bn makes Belgium the sixth largest economy in the eurozone, contributing approx. 4.0% (2014) to economic output. Belgium was a founder member of the
European Coal and Steel Community (1952) and the EEC (1958). Brussels is the headquarters of several major institutions (including the European Commission). Following
the parliamentary elections of 25 May 2014, in which the Flemish NV-A won the most
seats, agreement was reached on forming a government. As a result the current government was sworn in on 10 October 2014. The trade unions organised massive resistance to the socio-economic reform proposals (gradual raising of pension age to 67,
automatic adjustment of salaries to inflation). Economically, the Flemish north of the
country [BE2; share of national GDP: 57.5%] has now clearly outstripped the Walloon
south [BE3; 23.5% of GDP]. This is fanning the flames of separatism that have already
been smouldering for some time. The most important industry is the chemicals sector
(SITC 5, in particular basic chemicals, pharmaceuticals, plastics). However, the structure
of exports is much more balanced than it had been a year before, due to the international price competition for these intermediate products. This has also caused the balance of
trade to deteriorate. Main trading partners are Germany, the Netherlands and France.
The area around Antwerp is dominated by the oil, chemicals, automotive, iron and steel
industries. The port city is also the world's leading centre for the diamond trade (SITC
66). Machinery, transport equipment and electrical engineering are located in the region
of the capital, Brussels [BE1; 18.9% of GDP]. The key industries in Wallonia are food
and electrical engineering. A large number of foreign companies have branches in Belgium due to the positive aspects of its location.
[BE1] Region de Bruxelles-Capitale:
[BE10] Région de Bruxelles-Capitale
[BE2] Vlaams Gewest:
[BE21] Antwerpen
[BE22] Limburg (B)
[BE23] Oost-Vlaanderen
[BE24] Vlaams-Brabant
[BE25] Prov. West-Vlaanderen
[BE3] Région Wallonne:
[BE31] Brabant-Wallon
[BE32] Hainaut
[BE33] Liège
[BE34] Luxembourg (B)
[BE35] Namur
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Public admin, educ., human health, social
2 Trade, transport, accomodation, food serv.
3 Industry (except construction)
4 Professional, scientific, technical activities
5 Real estate activities
6 Others
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
11.2
30,528
402.0
Value
23.3
19.8
15.6
13.2
8.9
19.2
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Medicinal and pharmaceutical products
6.1%
11.5%
Road vehicles (including air-cushion vehicles)
10.8%
9.7%
Petroleum, petroleum products and related materials 5.5%
9.7%
Food, beverages and tobacco
9.0%
9.1%
Organic chemicals
3.0%
6.8%
Non-metallic mineral manufactures, n.e.s.
1.7%
5.3%
Plastics in primary forms
2.3%
5.1%
Iron and steel
2.9%
3.5%
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
3.1%
n.e.s.
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
3.0%
8
1
2
3
4
5
6
7
8
9
10
Exports (Countries)
Germany
France
Netherlands
United Kingdom
USA
Italy
Spain
India
China
Poland
Weight
16.8%
16.1%
12.0%
8.5%
5.5%
4.4%
2.5%
2.5%
2.0%
1.8%
Value
-7.26
-8.289
7.898
-6.122
2.174
12.282
5.352
16.658
23.324
-37.051
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Petroleum, petroleum products and related materials 12.0%
13.1%
Road vehicles (including air-cushion vehicles)
8.0%
9.7%
Medicinal and pharmaceutical products
4.9%
9.5%
Food, beverages and tobacco
8.6%
8.2%
Organic chemicals
3.0%
7.3%
Non-metallic mineral manufactures, n.e.s.
1.4%
5.3%
Crude materials
4.3%
4.4%
Gas natural and manufactured
3.0%
3.1%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
3.0%
8
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
3.0%
n.e.s.
1
2
3
4
5
6
7
8
9
10
Imports (Countries)
Netherlands
Germany
France
USA
United Kingdom
China
Ireland
Italy
Russia
Sweden
Weight
20.2%
13.1%
10.2%
7.3%
4.9%
4.0%
3.8%
3.5%
3.1%
1.9%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Belgium's economy focusses Belgium's central location in combination with its excellent intra-European transport links
on pharmaceuticals sector
(roads, rail, air, sea and inland waterways) is a major competitive advantage. Quite a few
and petrochemicals
non-European companies handle distribution of their goods throughout the European
continent via the port of Antwerp. Pharmaceutical products made in Ireland in particular
are distributed preferentially via Antwerp. In a European ranking (container handling), the
Belgian port city is No. 3 behind Rotterdam and Hamburg. Another major Belgian port is
Zeebrugge (West Flanders, near Bruges). Liège in French-speaking Wallonia is the
second-biggest inland port in Europe, after Duisburg. Liège is also the main hub in Belgium for air freight, while passenger flights are handled primarily via Brussels. Belgium is
connected both to the French TGV network and to the German ICE rail system.
Belgium is funded chiefly by
OLO and BTC
The Belgian Debt Agency provides information in three languages on its website about
the kingdom's debt securities. In mid-August 2015 Belgium had a total volume of EUR
312.5bn outstanding. At EUR 312.5bn, OLO (Obligations Linéaires, Lineaire Obligaties)
represent the country's main source of funding. According to information provided by the
Debt Agency (Funding 2015), EUR 33.3bn of this amount will become due by September 2016. The money market financing of the Belgian state is currently assured through
the placement of 19 Belgian Treasury Certificates (BTC; EUR 29.8bn). Almost EUR
10bn is covered by other medium to long-term instruments (e.g. EMTN/promissory
notes (Schuldscheine), securities for private clients, etc.). Detailed information can be
found in the Issue Calendar. Investors can also find a commentary on Belgian debt
securities in the Review 2013, 2014 Outlook. Additional publications are also available
for previous years.
EUR bonds Belgium (EURbn) – Maturity profile
Ratings Overview
100
Outlook
Fitch
AA
Negative
Moody’s
Aa3
Stable
S&P
AAu
Stable
Last updated: 20 August 2015
90
80
Amount Outstanding (EURbn)
LT
70
60
50
40
30
20
10
0
BELG
BGBRT
BGTB
BGB
2015
2016
0.1
15.1
10.6
5.0
13.2
25.6
2017
0.5
0.3
2018
0.1
0.2
2019
0.5
32.8
25.8
24.9
2020
2022
0.4
0.0
2023
0.1
0.0
2024
0.6
0.0
2025
0.1
2021
0.1
0.0
19.5
16.0
29.5
13.7
15.9
13.2
>2025
2.3
0.0
87.9
Source: Bloomberg, NORD/LB Fixed Income Research
Maturity
max. 30Y
5Y
OLO
Security
OLO; BGB
OLO; BGB
Day count
act/act
act/360
Coupon type
fix
FRN (EUR003M)
Cpn frequency
annual
quarterly
Issuance
monthly
occasionally
OLOs (Bloomberg: BGB) are medium to long-term government bonds, which are usually
placed via auction on a monthly basis. Ten auctions are scheduled this year. Apart from
August and December, they are held in a four-week cycle. The issue is scheduled for
Mondays in each case. In special cases, e.g. which issuing a new series, syndication is
used instead of an auction. At present there are 27 OLO series, of which two (BGB 0
02/15/16; EUR 3bn and BGB 0 05/02/18; EUR 2.5bn) are issued as FRN. Most series
represent a volume of at least EUR 11bn. In 2013 the OLO maturity date was shifted
from the usual dates of 28 March or, as the case may be, 28 September, to 22 June.
Stripping and reconstruction of OLO have been possible since 1992. The buy-back of
Belgian OLO has been announced as OLO buy backs. A special feature is the ORI auction (Optional Reverse Inquiry Auction), in which selected dealers get the opportunity to
acquire off-the-run OLO. These auctions, which are used when secondary market liquidity is low, are generally scheduled for the 2nd Friday in a month.
Promissory loand notes
(SSD)*
*SSD: not securities, but loans
securitised by means of borrower’s
note
Maturity
3m (EUR)
6, 12m (EUR)
< 3m (FX)
Security
BTC; BGTB
BTC; BGTB
BTB; BGTB
Belgian Treasury Certificates
(BTC) and
Belgian Treasury Bills (BTB)
Maturity
3, 5, 8Y
Security
BGBRT
Belgium Govt Retail Bond
(BGBRT)
Maturity
various
BELG
Security
BELG
The Belgian Treasury issues borrower’s note loans (SSD) specifically for German institutional clients (insurance companies, pension funds). The volume of SSD usually remains
low in order to avoid competing with the issue of OLO. Transactions up to EUR 55m
were usual in the course of the year. The peak in 2012 was EUR 135.5m (maturity:
20.01.2033), while EUR 3m (maturity: 05.07.2028) represented the lower boundary. A
total of EUR 114m was issued in the past year. This was followed by EUR 139m in January 2015 alone. Due to the "no mark-to-market-rule", which enables accounting treatment at a constant price (usually 100%), this form of investment is more attractive than
the usual government bonds, especially in the current low interest rate environment, and
has even gained attractiveness.
Day count
act/360
act/360
act/360
Coupon type
zero
zero
zero
Cpn frequency
discounted
discounted
discounted
Issuance
twice a month
once a month
occasionally
With regard to money-market paper, Belgians make a distinction between Treasury Certificates (BTC) and Treasury Bills (BTB). These instruments are comparable in terms of
their legal and fiscal status. The main difference is that BTC are denominated solely in
euro and are issued through auctions on the basis of standardised characteristics. In
contrast, BTB may additionally be issued in the currencies of other OECD Member
States and offer the advantage of being "tailor-made" to meet specific client requirements. Foreign currency BTBs have existed since mid-1996 and are thus older than the
BTC programme. BTB usually have a term less than three months, while BTC are offered with maturities of 3, 6 and 12 months. While the 3-month BTC are available every
two weeks, the other two maturities are placed on an alternating basis (monthly).
Day count
act/act
Coupon type
fix
Cpn frequency
annual
Issuance
occasionally
For retail customers, the Belgian Debt Agency offers a whole series of small-volume
government bonds. These are denominated in euro without exception and offer a fixed
coupon. With regard to characteristics, this paper is comparable with OLO. So far, instruments with maturities of 3, 5 or 8 years have been issued. Three bonds with ten-year
maturity were added in 2014 and 2015. By far the biggest bond is BGBRT 4 12/04/16
(EUR 4.7bn). Since only three out of 48 BGBRT have a volume more than EUR 100m,
the median of all BGBRT is a very low EUR 17.75m.
Day count
various
Coupon type
various
Cpn frequency
various
Issuance
occasionally
In every respect, the EMTN programme includes extremely flexible financial instruments
issued by the Belgian Treasury, with maturities between one month and 50 years. In
addition to euro-denominated issues, other currencies of an OECD member are also
permitted. The coupon type also enjoys maximum flexibility.
3
3
2
2
1
1
0
0
-1
06.2014
08.2014
10.2014
2 Yr
4 Yr
12.2014
02.2015
5 Yr
7 Yr
04.2015
-1
08.2015
06.2015
10 Yr
Yield (%)
Yield (%)
Belgian Govt Bonds –Yields (%)
30 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
Michel is prime minister –
NV-A dominates
government
The separatist NV-A party emerged as the winner in the Belgian parliamentary elections.
However, the prime minister (Charles Michel) is not drawn from its ranks - he belongs to
the liberal Walloon MR party. Posts in the most important ministries (Interior, Defence,
Finance, Civil Service) are nevertheless held by NV-A politicians, so it could be said that
the Flemish population is dominant in the government.
Belgium's government debt
has risen once again
Belgium did not comply with either of the Maastricht criteria in 2014. For example, Belgium's government debt rose to 106.5% of GDP (2013: 104.4%), while new borrowing
rose again to -3.2% of GDP (2013: -2.9%). (chart on the left)
Reform of budget
consolidation has begun
Belgium has established the most important steps on the way to budget consolidation in
its stability programme. Further strategically important details can be found in the Belgian reform programme both at national level and specific to each region. The new government has also introduced a reform process, intended to improve Belgium's competitiveness and consolidate the state finances.
Gross debt vs. budget balance (%)
Total revenue vs. total expenditure (EURbn)
120
1
0
100
-1
80
-2
60
-3
40
-4
20
-5
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
2005
0
2006
2007
2008
2009
2010
2011
2012
2013
-6
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
2013
2014
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
2014
Social contributions and
taxes on income, wealth etc.
each account for one third of
all revenue
At EUR 205.5bn in 2014, Belgium exceeded the previous year's figure (2013: EUR
203.7bn), thus obtaining the highest revenue in the whole period under review. Revenue
from the most important item, social contributions, increased from EUR 65.6bn (2013) to
EUR 66.4bn in 2014. They again made up approximately one third of all revenue. Taxes
on income, wealth etc. (EUR 67.5bn), the focus of the Belgian tax system, were in a
similar magnitude. Revenue from these direct taxes rose by around EUR 1.5bn year-onyear. The third pillar of the country's revenue, taxes on production and imports, posted
an increase to EUR 51.7bn (2013: EUR 51.0bn). In the period covered by the review,
this item thus only saw a moderate decline between 2008 and 2009. Other revenue went
down from EUR 20.9bn (2013) to around EUR 19.7bn.
Expenditure is rising faster
than revenue
The expenditure trend was less encouraging. At a total of EUR 218.5bn (2013: EUR
215.2bn), expenditure rose much more strongly than revenue. Social benefits and social
transfers amounted to EUR 101.7bn (2013: EUR 99.4bn), so their share of total expenditure fell to 46.5%. The second-biggest block of expenses is compensation of employees.
At EUR 50.2bn, it was also higher than in 2013 (EUR 49.2bn). Against the background of
continuing good terms for funding on the capital markets, the payable interest item remained constant at EUR 12.4bn in 2014 (2012: EUR 13.3bn). It only made up 5.7% of all
expenditure (2013: approx. 6.0%). Other expenditure totalled EUR 47.2bn, representing
a moderate rise compared to the 2013 figure (EUR 46.6bn). At only EUR 7.0bn, expenditure on capital transfers was below the figures for the two previous years (2013: EUR
7.5bn, 2012: EUR 9.0bn).
Comment – Public finances
The political orientation of the new government coalition is centre-right. The initial reforms are aimed at improving the financial situation (pension at 67, no dynamic adjustment of salaries) and so they can be regarded as positive. However, the resistance organised by the trade unions was significant, so the extent to which the reforms can be
implemented remains uncertain. The economic outlook is quite positive in Q1/15: at
0.3% of GDP, economic growth is marginally above budget quarter-on-quarter. The
dominance of Flemish people is a conspicuous element of the government. It is now
barely possible to discuss a balance between the language groups within the government. The problems of the language dispute are thus not resolved over the long term.
The European Commission is critical of the regional structures, which restrict not only the
efficiency of the public administration, but also labour mobility. The debt level has risen
further - it is also influenced by state support for financial institutions (in particular Dexia,
Fortis). In an EU 19 comparison, it is substantially above the average of 91.9% of GDP.
Strengths & opportunities
Weaknesses & risks
+
Logistical interface in Europe
–
Separatism jeopardises Belgian unity
+
Worldwide diversified trading partners
–
Wallonia's competitiveness is low
+
Reform process initiated
–
Government debt of 106.5% of GDP
+
Involvement in international cooperations
–
Inefficiencies in regional structures
+
Balanced tax system
–
Cost of healthcare and pension system
+
Attractive risk premium versus Bunds
–
Strong resistance against reform plans
Source: NORD/LB Fixed Income Research
Comment – Bond market
In the AA segment, we regard Belgian government bonds primarily as an alternative to
more liquid French government bonds. Due to the successful formation of a government
in 2014 and the fading sense of crisis around the world, Belgian spreads had normalised
to a large extent in recent years. However, following the parliamentary elections in May
2014, another political stalemate cannot be ruled out. As a result the risk premiums on
Belgian government bonds could again come under pressure.
Austria
Austria is pressing ahead with winding up Heta
Austria is divided into three
NUTS 1 regions and nine
NUTS 2 regions:
With GDP of EUR 329.3bn (2013: EUR 322.9bn), Austria accounted for around 3.3% of
the eurozone’s GDP in 2014. Austria has been a member of the EU since 1995. Small
and medium-sized enterprises are systematically promoted and are characteristic of the
Austrian economy. Machinery and transport equipment (SITC 7) dominate foreign trade.
The main trading partner by far is Germany, followed by Italy and the USA. Vienna
[AT13] is the undisputed leading service and financial centre and, at 26%, contributes
over a quarter of the nation's GDP. The Vienna Basin is the most important economic
conurbation and is home to several different industries (including chemicals, metalwork,
food and paper). In terms of contribution to the nation's GDP, Vienna (26.0%) is the
leader by a wide margin, followed by Upper Austria [AT31; 16.9%], Lower Austria [AT12;
15.8%) and Styria [AT22; 12.5%]. Upper Austria (esp. Linz) and Styria have various
industrial clusters (including automotive suppliers, machinery, food and timber). As a
result of the notable revenue from tourism, Austria's trading deficit is traditionally
countered by a positive balance of services. In 2014, travel generated a positive balance
of EUR 7.4bn, around half of which was attributable to German tourists alone. The most
important tourist region is West Austria (Tyrol, Salzburg). Austria has benefited in
particular from robust growth in Germany, its main trading partner.
[AT1] Ostösterreich:
[AT11] Burgenland
[AT12] Niederösterreich
[AT13] Wien
[AT2] Südösterreich:
[AT21] Kärnten
[AT22] Steiermark
[AT3] Westösterreich:
[AT31] Oberösterreich
[AT32] Salzburg
[AT33] Tirol
[AT34] Vorarlberg
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Trade, transport, accomodation, food serv.
2 Industry (except construction)
3 Public admin, educ., human health, social
4 Real estate activities
5 Professional, scientific, technical activities
6 Construction
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
8.5
83,879
329.3
Value
21.9
21.7
17.6
10.0
9.1
19.5
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Road vehicles (including air-cushion vehicles)
10.8%
7.8%
1 Germany
29.4%
Food, beverages and tobacco
9.0%
7.2%
2 Italy
6.2%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 6.7%
parts thereof3(including
USA
non-electrical counterparts, n.e.s.,
5.6%
of electrical household-type
Medicinal and pharmaceutical products
6.1%
6.4%
4 Switzerland
5.2%
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
6.2%
n.e.s.
5 France
4.8%
Machinery specialized for particular industries
3.3%
5.5%
6 Slovakia
4.1%
Manufactures of metals, n.e.s.
3.1%
5.5%
7 Hungary
3.4%
Iron and steel
2.9%
5.2%
8 Czech Republic
3.3%
Power-generating machinery and equipment
2.8%
5.0%
9 Poland
3.0%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
4.8%
8
10 Russia
3.0%
Value
8.45
-3.797
15.405
7.402
0.332
7.67
-5.531
-2.151
2.199
-9.245
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Road vehicles (including air-cushion vehicles)
8.0%
9.5%
1 Germany
41.9%
Food, beverages and tobacco
8.6%
7.4%
2 Italy
6.4%
Petroleum, petroleum products and related materials 12.0%
6.4%
3 Switzerland
5.4%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 6.1%
parts thereof4(including
Czech Republic
non-electrical counterparts, n.e.s.,
4.4%
of electrical household-type
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
5.4%
n.e.s.
5 Netherlands
4.0%
Medicinal and pharmaceutical products
4.9%
5.3%
6 China
3.6%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
4.7%
8
7 Hungary
2.9%
Crude materials
4.3%
4.5%
8 Slovakia
2.7%
Manufactures of metals, n.e.s.
2.8%
4.2%
9 France
2.7%
Telecommunications and sound-recording and reproducing
3.4%
apparatus4.1%
and equipment
10 Belgium
2.3%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Austria focuses on hydroelectric power, rail and
waterways
Austria does not have any nuclear power stations in operation and instead obtains just
under 70% of its electricity needs from renewable energies. As a traditional transit
country between Italy and Germany, reducing the volume of road traffic is particularly
important. In its accession negotiations (1994), Austria already made reducing heavy
goods traffic a central condition of its EU membership. The Brenner Base Tunnel, which
is to be a core part of the Trans-European transport network (TEN-V), is scheduled to be
completed in 2026. The most important inland waterway is the Danube. Statistics show
that Austria transported around 10 million tonnes of freight via the river in 2014. Ores
and metal waste (2.61 million tonnes) as well as mineral oil products (1.81 million
tonnes) were the most frequently transported goods. With the volume of passengers up
by 2.2% on the previous year to 22.4 million, Vienna-Schwechat, remains the country's
most important airport. In 2014, freight rates at Vienna airport stood at 277,532 t.
OeBFA is Austria's debt
management office
OeBFA (Austrian Treasury) is responsible for debt portfolio and liquidity management.
The majority of financing is carried out via regular auctions of government bonds
(Bundesanleihen, RAGB), which since 2003 have covered the entire medium to longterm maturity spectrum. The last Federal note (Bundesobligation) was issued at the end
of 2002, which means that the current issuance calendar exclusively comprises
government bonds. The ADAS (Austrian Direct Auction System) platform is available for
auctions. In addition, each year Austria carries out one or two syndicated issues. There
are no inflation-linked government bonds or FRN. Other financing instruments are
represented by various programmes (EMTN, Austrian Treasury bills, AUD-MTN) as well
as loan and promissory note loan formats. According to Eurostat, around three-quarters
of all Austrian debt securities are held by foreigners and a fifth by domestic financial
institutions. The gross financing requirement for the current year is estimated at EUR
22bn to EUR 24bn and the majority of this figure (two-thirds) is already covered (as at:
August 2015). Further information is available in the current investor presentation and
the annual reviews.
EUR bonds Austria (EURbn) – Maturity profile
Ratings Overview
Outlook
45
Fitch
AA+
Stable
40
Moody’s
Aaa
Stable
35
S&P
AA+
Stable
Last updated: 20 August 2015
Amount Outstanding (EURbn)
LT
30
25
20
15
10
5
0
AUST
RAGB
2016
0.1
11.6
2017
0.1
17.9
2018
19.3
2019
0.2
25.8
2020
2.6
13.0
2021
14.9
2022
0.1
18.5
2023
0.1
8.5
2024
10.3
2025
0.3
5.6
>2025
0.2
42.1
Source: Bloomberg, NORD/LB Fixed Income Research
Maturity
max. 12m
Security
ATB; RATB
Day count
act/360
Coupon type
zero
Cpn frequency
discounted
Issuance
regularly
Austria Treasury Bill (RATB)* Unlike in the past, the Bloomberg financial information system displays 21 EUR money
market papers (RATB) – exclusively dominated in USD - representing a volume of EUR
7.4bn or USD 8.2bn. However, according to the OeBFA, this volume does not match the
real issuance either. Since most of the RATB are private placements these amounts are
not made public. The RATB programme has been in place since March 1999 and is
unlimited in terms of amount. RATB are generally "issued on a tailored basis" as private
placements and are popular with buy-and-hold investors. The money market programme
* Any FX risks directly hedged on
also includes foreign currencies (e.g. USD, GBP and AUD). Currently only USD bonds
issue of RATB
are outstanding.
Maturity
max. 70Y
Security
Bund.; RAGB
Government bonds
(Bundesanleihen, RAGB)
Maturity
7d to 70Y
Security
AUST
Austria Govt International
Bond (AUST) *
* Any FX risks directly hedged on
issue of RATB
Day count
act/act
Coupon type
fix
Cpn frequency
annual
Issuance
once a month
Austrian government bonds (Bundesanleihen) are medium and long-term debt securities
with maturities of up to 70 years, which are placed via auction or syndication. At present,
21 bonds with an outstanding volume of EUR 187.3bn are in issue. In addition to offering
core maturities of between two and ten years, Austria also services investor demand in
ultra-long maturities. The bond with the longest life is RAGB 3.8 01/26/62 (EUR 3.4bn),
which was issued in 2012 as a 50-year bond. Two other ultra-long maturities are also
offered (2037, 2044). RAGB 4.15 03/15/37 has a volume of EUR 12.1bn and RAGB 3.15
06/20/44 has a volume of EUR 6.4bn. Government bonds can be stripped and
reconstructed. The Collective Action Clauses mandatory since the beginning of 2013 for
European government bonds with maturities equal to or greater than a year are
described in detail in the General Terms and Conditions for Government Bonds.
Day count
various
Coupon type
various
Cpn frequency
various
Issuance
occasionally
The EMTN programme is very flexible and includes maturities ranging from 7 days to 70
years. The Austria Govt international bonds (AUST) included in the Bloomberg system
are in the long-term maturity band. At present, 19 (3 fixed, 15 variable, 1 FRN) of the 34
bonds are denominated in euros. However, at EUR 3.6bn (out of EUR 9.1bn) they
represent less than half of all bonds in this category. Foreign currencies in this case are
USD, CHF, NOK, JPY, CAD as well as SKK.
3
3
2
2
1
1
0
0
-1
06.2014
-1
08.2014
2 Yr
10.2014
4 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
12.2014
5 Yr
01.2015
7 Yr
04.2015
06.2015
10 Yr
08.2015
30 Yr
Yield (%)
Yield (%)
Staatsanleihen Österreich – Renditen (%)
Austria’s debts at new record Austria’s debt ratio grew in 2014 to 84.5% of GDP (2013: 80.9% of GDP). This is an
high
increase of 3.6% in total compared with the previous year and represents a new record
high in the period under review. The surge in debt can be attributed to government
figures, while the Länder and local authorities recorded slightly declining figures.
Detailed plan of revenues and A debt brake was resolved as early as 7 December 2011, which stipulates that the
expenses until 2018 in the
structural deficit may not exceed 0.35% of GDP from 2017 onwards. However, as a
Stability Programme 2014
result of a veto by the Opposition, this debt brake was not enshrined in the Constitution
at that time. On 28 March 2012, a "Savings and Consolidation Package" was adopted. A
detailed outlook of possible developments of revenues and expenses until 2018 are
provided in the current Stability Programme. Additional objectives are specified in the
national Reform Programme.
In 2014 Austria generated revenues of EUR 164.0bn, once again topping the previous
year's figure (2013: EUR 159.9bn) and setting another record in the period under review.
With the exception of other revenues, all line items recorded renewed growth. At
approximately 30.9%, social contributions (EUR 50.8bn) account for the biggest share of
revenue. Taxes on income and wealth rose from EUR 42.9bn (2013) to EUR 45.1bn and
recorded the largest increase in absolute terms. Taxes on production and imports went
up by 2.1% to EUR 47.5bn. Other revenues totalled EUR 20.6bn in 2014, falling short of
the figure for 2013 (EUR 21.3bn).
Revenues are continuing to
rise
Gross Debt vs. Budget Balance (% of GDP)
Total Revenue vs. Total Expenditure (EURbn)
180
100
0
160
90
-1
140
80
120
70
-2
100
60
50
-3
80
60
40
-4
30
40
20
20
-5
10
0
2005
0
-6
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
2013
2014
2006
2007
2008
2009
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
2010
2011
2012
2013
2014
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
Public spending rises by
4.8%
Source: Eurostat, NORD/LB Fixed Income Research
Expenditure totalled EUR 171,9bn in 2014, which is a significant rise of EUR 7.9bn
versus the previous year (2013: EUR 164.1bn) (2013 vs. 2011: EUR 2.6bn). Benefits
and social transfers (EUR 76.7bn) were the largest item. They were up EUR 2.6bn
compared with 2013. By contrast, expenditure for compensation of employees saw a
modest year-on-year increase to EUR 34.8bn. Capital transfers, which include funds to
support the banking sector, experienced the largest relative growth, rising from EUR
3.9bn in 2013 to EUR 6.6bn in 2014. The line item payable interest reduced from EUR
8.0bn (2013) to EUR 7.8bn. Other expenditure came to EUR 46.1bn in total, which is a
significant increase on the figure for the previous year (EUR 43.8bn).
Comment – Public finances
Austria is pressing ahead with the liquidation of Heta, successor to the former Carinthian
state bank Hypo Alpe Adria. In the wake of the forced nationalisation of the bank during
the financial crisis, a dispute erupted between the state of Carinthia, the Austrian state
and the bank’s creditors concerning liability for the bad debts. After providing EUR 5.5bn
of aid, the Austrian government suspended further payments in March 2015. The
Austrian Financial Market Authority then imposed a moratorium on debt repayments,
meaning that the Banking Recovery and Resolution Directive (‘BRRD’) took effect for the
first time as part of a wind-up. In total, the state of Carinthia is liable for debts of EUR
10bn, which represents a significant contingent liability given that the annual budget is
some EUR 2bn. The Republic of Austria has concluded an initial out-of-court settlement
with BayernLB. According to Reuters, it will enable the German bank to recover at least
EUR 1.23bn and therefore just under half of the outstanding receivables. This settlement
also sends out a message to Heta‘s other creditors (e.g. Commerzbank, HSH Nordbank,
NORD/LB), who have filed a collective suit. It is very important for the state of Carinthia
in particular, which is unable to fund itself on the capital market at present, and for the
Austrian state to make headway in the biggest financial scandal in Austria’s post-war
history, if only to prevent its attractiveness to investors being damaged even further.
Strengths & opportunities
Weaknesses & risks
+
closely linked to German economy
–
exports EU-focussed
+
trading partners in CEE
–
CEE exposure of banking sector
+
modern infrastructure
–
costs of healthcare and pensions
+
political stability (grand coalition)
–
busy transport routes (transit country)
+
AAA rating (Moody’s)
–
Rise of euro-sceptic parties
–
Demographic change in society
Source: NORD/LB Fixed Income Research
Comment – Bond market
Austria is heavily dependent on foreign investors, but given its excellent rating, we do not
see this as a problem. Austria offers attractive yield pick-ups versus German, French
and Belgian bonds for each investor group. In the AAA universe, we view Austrian
government bonds as a suitable alternative to German bunds.
Finland
Storm clouds on the horizon
Finland is divided into two
NUTS 1 regions and five
NUTS 2 regions:
Finland joined the EU in 1995 and with GDP of EUR 205.2 bn, contributes approx. 2% to
the economic output of the EU 19 (2014). Due to the changes in the Finnish economy,
for the first time since the monetary union came into existence, in 2014, Finland was
unable to satisfy both the Maastricht criteria (new debt 3.2 % of GDP, total indebtedness
59.3% of GDP in 2014). Economic growth was also negative for the third year in succession (-0.4 % of GDP in 2014), with the result that it has still not returned to the pre-crisis
level of 2008. Primarily, the decline in electronics exports as a consequence of the
downturn in the fortunes of former global player Nokia, coupled with the financial crisis,
resulted in a negative balance of trade, impacting directly on public finances and economic growth. The share of national GDP attributable to the Nokia Group fell from 4.0%
(2000) to -0.2 % in 2012. The shares of exports held by SITC 6 products (manufactured
goods, paper, cardboard, iron and steel), traditional Finnish products, and (refined) petroleum products are comparatively high. Since oil (predominantly sourced from Russia)
is also the major imported product, a certain dependency of the Finnish energy sector on
Russia may be inferred. In the light of Russia’s conduct in the Ukraine, Finnish politicians are increasingly discussing abandoning the country‘s previous bloc neutrality in
favour of joining NATO. Apart from Germany, its most important trading partners (Sweden, Russia) are not members of the Eurozone. At 37.7%, Helsinki-Uusimaa contributes
the largest share to national GDP. Helsinki, Espoo and Vantaa form the most important
business conurbation in the country, which lies only 80km away from Tallinn, the Estonian capital. 22.9% of Finland's economic output is generated in West Finland where the
manufacturing industry has a stronger presence than in the south, followed by South
Finland (inc. Lahti and Turku) with an 18.9% share of the national GDP. The regions of
North and East Finland were amalgamated with the result that this territory accounts for
around 19.8% of national GDP. In North Finland there is a major information and communications technology (ICT) cluster in the Oulu area. In recent years, the importance of
mining and exploration (especially metal ores) has also been growing. East Finland
primarily relies on the timber industry which is still the dominant Finnish industry.
[FI1] Manner-Suomi:
[FI19] Länsi-Suomi
[FI1B] Helsinki-Uusimaa
[FI1C] Etelä-Suomi
[FI1D] Pohjois-ja Itä-Suomi
[FI2] Åland
[FI20] Åland
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Public admin, educ., human health, social
2 Industry (except construction)
3 Trade, transport, accomodation, food serv.
4 Real estate activities
5 Professional, scientific, technical activities
6 Construction
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
5.5
338,435
205.2
Value
22.2
18.7
17.0
13.1
8.4
20.6
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Paper, paperboard and articles of paper pulp, of paper or1.6%
of paperboard
12.7%
1 Germany
12.3%
Petroleum, petroleum products and related materials 5.5%
11.6%
2 Sweden
11.2%
Crude materials
3.0%
8.7%
3 Russia
8.6%
Machinery specialized for particular industries
3.3%
6.3%
4 USA
6.9%
Iron and steel
2.9%
6.2%
5 Netherlands
6.2%
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
5.9%
n.e.s.
6 United Kingdom
5.4%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 5.8%
parts thereof7(including
China non-electrical counterparts, n.e.s.,
4.7%
of electrical household-type
Power-generating machinery and equipment
2.8%
4.3%
8 Estonia
3.3%
Road vehicles (including air-cushion vehicles)
10.8%
3.9%
9 Belgium
3.2%
Non ferrous metals
1.8%
3.7%
10 France
2.8%
Value
-2.08
0.13
0.446
-0.942
-2.173
3.563
-0.697
-3.841
2.578
-0.785
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
17.6%
1 Sweden
16.5%
Food, beverages and tobacco
8.6%
7.6%
2 Germany
15.7%
Crude materials
4.3%
7.2%
3 Russia
13.8%
Road vehicles (including air-cushion vehicles)
8.0%
6.9%
4 Netherlands
7.6%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 5.7%
parts thereof5(including
Denmarknon-electrical counterparts, n.e.s.,
4.4%
of electrical household-type
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
4.4%
n.e.s.
6 China
3.4%
Other transport equipment; confidential traffic of section 3.0%
7
3.5%
7 United Kingdom
3.2%
Medicinal and pharmaceutical products
4.9%
3.4%
8 France
3.1%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
3.2%
8
9 Belgium
3.1%
Telecommunications and sound-recording and reproducing
3.4%
apparatus2.9%
and equipment
10 Estonia
3.0%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Marine transport is the No. 1
in terms of logistics
As a result of its geographical position, Finland is only connected to the other members
of the Eurozone to a small extent. Around 80% of foreign trade is conducted by sea.
Helsinki (South), Rauma (South West) and Kokkola (West) are the most important seaports. To date, Russian goods in particular are shipped overseas (America, Asia, Australia) via Kokkola. Competition for Finnish ports will be coming from the big Russian port
currently under construction in Ust-Luga, which is located around 100 km from St. Petersburg and looks set to reach an annual freight volume of 180 million tonnes as from
2018. The most important Finnish airport is Helsinki-Vantaa. The import of Russian oil
constitutes a particularly high cost factor, which is why the use of nuclear energy is being
further expanded. Consequently, another pressurised water reactor is being built on the
Olkiluoto peninsula (near Rauma) with German and French participation.
EUR bonds Finland (EUR bn) – Maturity profile
Ratings Overview
14
LT
Outlook
Fitch
AAA
Negative
Moody’s
Aaa
Negative
S&P
AA+
Stable
Last updated: 20 August 2015
Amount Outstanding (EURbn)
12
10
8
6
4
2
0
RFRB
FINL
RFTB
RFGB
2016
0.0
2017
2018
2019
2020
2021
2022
2023
2024
2025
>2025
6.0
5.0
5.0
5.0
9.0
11.5
0.1
0.2
6.5
11.0
5.0
5.0
11.5
Source: Bloomberg, NORD/LB Fixed Income Research
Finland issued new
syndicated bond with
16-year maturity on
02 March
Maturity
5 to 30Y
Security
Fin.Govt.; RFGB
sarjaobligaatiot Finnish Govt. Bond (RFGB)
Maturity
max. 364d (EUR)
max. 364d (USD)
On 02.03.2015, Finland issued a new syndicated bond with 16-year maturity (RFGB 0
3/4 04/31); EUR 3 bn.). The issue was 1.6 times oversubscribed and offered an issuing
yield of just 0.844 % (MS -15 BP), compared to 2,055% (MS +5 BP) for a 10-year maturity the previous year. However, this was not a problem for the investors, the majority
of whom came from the UK and German-speaking regions. According to the Finnish
Treasury, UK investors took around 22 % of the issue onto their books. Investors from
the German-speaking regions (Germany, Austria, Switzerland) availed themselves in
equal measure whilst Belgium, the Netherlands and Luxembourg only accounted for a
combined share of 12%. However, 15% of the issue was held by Finnish investors. In
terms of investor type, around one third of the volume of RFGB 0 3/4 04/31 is attributable to pension funds and insurance companies and 26% to fund managers, central
banks amounting to 5%.
Day count
act/act
Coupon type
fix
Cpn frequency
annual
Issuance
twice a Year
Finnish government bonds (RFGB) are fixed income bonds with an annual coupon payment. Each bond represents a volume of between EUR 3 bn and EUR 6.5 bn. Every
year, 5-year and 11-year benchmarks are issued. The term of the longest dated Finnish
bond is (RFGB 2 ⅝ 07/04/42), with a volume of EUR 3.5 bn. There will be no (further)
redemption of a bond in 2015; the country's only redemption in 2016 concerns RFGB 1
3/4 04/15/16, which, with a volume of EUR 6.5 bn, is one of Scandinavia's two biggest
single bonds. There also appear to be plans for two to four tap issues of existing series
this year. According to information from the Finnish Treasury, the total volume of all
outstanding bonds this year will climb by EUR 5.3 bn.
Security
Fin.Treas.; RFTB
Fin.Treas.; RFTB
Day count
act/360Non-EOM
act/360
Coupon type
zero
zero
Cpn frequency
discounted
discounted
Issuance
occasionally
occasionally
Treasury bills (RFTB) are money market papers issued at irregular intervals with a maxvelkasitoumukset Finnish Treasury Bills (RFTB) imum maturity of 364 days. RFTB are issued in EUR or USD. Currently only two RFTB
(total: EUR 3.4 bn) are issued, of which EUR 150 million (RFTB 0 03/08/16) are denominated in EUR. The USD bond (RFTB 0 10/21/15), EUR 3.2 bn) was issued on 06 May
2015.
Maturity
5, 10Y (EUR)
4, 5, 10Y (FX)
Security
Fin.Int.; FINL
Fin.Int.; FINL
Finnish International Govt.
Bond (FINL)
Day count
act/360
various
Coupon type
FRN (EUR003M)
various
Cpn frequency
quarterly
various
Issuance
occasionally
occasionally
At EUR 100 m, the volume of the only remaining EUR-denominated bonds in this category (FINL 0 01/20/20) is very low. To attract more money from investors, the supply is
supplemented by foreign currency EMTN. In addition to seven USD-denominated bonds
(EUR 8.9 bn), GBP (EUR 3.9 bn) and SEK (EUR 1.3 bn) and NOK (EUR 609 m) serve
as additional issuance currencies. The selection of these currencies provides further
evidence that a significant share of Finland's investor base is not part of the Eurozone.
3
3
2
2
1
1
0
0
-1
06.2014
08.2014
2 Yr
10.2014
4 Yr
12.2014
5 Yr
02.2015
7 Yr
04.2015
10 Yr
06.2015
Yield (%)
Yield (%)
Finnish Govt Bonds –Yields (%)
-1
08.2015
30 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
Finland has no need of an
issuance calendar
With a total volume of EUR 81.2 bn (18 bonds), Finland is a relatively small issuer by
comparison with other European countries. Its issuance activities centre on government
bonds (RFGB; Finnish government bonds; sarjaobligaatiot), which are supplemented in
the ultra-short maturity spectrum by money market papers (RFTB; Finnish Treasury bills;
velkasitoumukset). Primary issues are placed by the Finnish State Treasury (valtiokonttori), generally via syndication, in order to best meet the needs of investors and
ultimately also to achieve maximum acceptance in the secondary market. Taps are
carried out exclusively as auctions. There is no Finnish issuance calendar for the reasons given above. Foreign investors are extremely important for Finland. According to
Eurostat, around 80% of all Finnish bonds are held by foreigners, which is the highest
figure of all the EU 19 member states. For 2015 as a whole, Finland plans to raise EUR
16.9 bn (EUR 4.9 bn net) which mainly comprises RFGB (EUR 10.0 bn) and RFTB
(EUR 5.3bn). In addition to the standard products, the Finnish Treasury maintains an
EMTN programme which provides for the issue of FRN and foreign currency bonds.
While foreign investors are the target group for the latter, the very small (EUR 8.1 m in
total) supply of EUR-denominated retail bonds (RFRB) is geared to domestic retail clients. RFRB are therefore not presented separately below. Neither the EMTN programme nor retail bonds represent volumes that compete more closely with Finnish
government bonds. An overview of Finnish debt securities is available from the website
and other publications.
Finland no longer meets the
Maastricht criteria
With a general government debt of 59.3% of GDP (2013: 55.8%) and a total government
deficit of -3.2 % of GDP (2013: -2.5%), Finland is only able to meet one of the Maastricht criteria, total indebtedness in 2015 being projected to rise above the guideline
value of 60% of GDP.
Outlook for Finnish
economic development
The Finnish economy again contracted in 2014 (-0.4% of GDP), while expectations for
2014 (0.8% growth in GDP) were not met. New debt was also 3.2% higher than expected (2.5 % of GDP). In Q1/2015 the Finnish Ministry of Finance estimates the economic growth in 2015 at 0.5%. New debt is projected to continue above 3% of GDP
total, and as a result, total indebtedness will exceed 60% of GDP. The challenges facing
the Finnish economy are not diminishing – the restructuring of the Finnish economy
away from an export-driven economic structure towards one that is broad-based is in full
swing.
Current taxes on income,
wealth etc. remain No. 1
revenue source
Finland increased its revenue to EUR 113.3 bn in 2014 (2013: EUR 111.6 bn), which is
the highest level in the period under review. Revenue slumped significantly between
2008 (EUR 99.4 bn) and 2009 (EUR 92.0 bn), but has clearly recovered again since
then. Social contributions rose to EUR 26.3 bn in 2014 (2013: EUR 25.9 bn), but still
remain only the third biggest revenue item. Taxes on production and imports rose to
EUR 29.6 bn (2013: EUR 28.7 bn). At just over 30% of total revenue, taxes on income,
wealth etc. (EUR 33.7 bn) made the greatest contribution. Other revenue remained
constant at EUR 23.5 bn.
Government debt vs. budget balance (%)
Total revenue vs. total expenditure (EUR bn)
120
100
6
90
5
80
4
70
3
60
2
50
1
40
0
30
-1
20
-2
10
-3
0
-4
100
80
60
40
20
0
2005
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
Expenditure continues to
grow
2013
2014
2006
2007
2008
2009
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
2010
2011
2012
2013
2014
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
However, total expenditure increased faster than revenue (chart right). In 2014, expenditure totalled EUR 119.7 bn, which compared with 2013 (EUR 116.7 bn), represented a
rise of around EUR 3.0 bn (2013 vs. 2012: EUR 4.4 bn). The main problem area is monetary social benefits and social transfers in kind, which climbed to EUR 45.9 bn in 2014
(2013: EUR 43.9 bn). This line item broke through the EUR 40 bn threshold for the first
time in 2012. The second biggest individual cost block (EUR 29.2 bn) is employee remuneration (2013: EUR 29.1 bn). As a result of positive capital market conditions, interest payable remained constant at EUR 2.5 bn, accounting for just 2.1% of total expenditure. The figure in 2001, at EUR 3.7 bn, was still comparatively high. At EUR 605 m,
capital transfers played no relevant role for Finland, and in fact the line item was slightly
reduced. All other line items came to EUR 41.4 bn in total (2013: EUR 40.4 bn).
Comment – Public finances
Finland is economically and politically stable, has a good infrastructure and is technologically advanced. However, the country faces major challenges particularly as a result of
the waning importance of its former flagship electronics and timber industries, as well as
the high level of dependency on Russian energy imports, which is reflected particularly
in the debt figures. In 2015, Finland will fail to satisfy both the Maastricht criteria for the
first time in the period under review – which, due to the debt situation, which remains
within the comfort zone at present, is still not having any serious consequences. In our
opinion, the benefits of the common currency for Finland are undermined by the fact that
its main trading partners, Sweden and Russia, are not part of the common currency area
and there are also quasi no overland transport links with other members of the EU 18.
The construction of the Russian seaport at Ust-Luga is likely to reduce Finland's importance as a distribution hub in the Baltic. With regard to development of its national
economy, we believe there is an increased likelihood of negative surprises, and it has
not been possible to fulfil the forecasts for 2014. As in France, the importance of industry
(excluding construction) is waning and this is primarily reflected in the negative movement in the current account balance. Eurostat reports a deficit of EUR 2.0 bn for 2014.
Strengths & opportunities
Weaknesses & risks
+
Traditional trade in the Baltic region
–
Export industry is losing market shares
+
Technologically advanced
–
De-industrialisation
+
Upturn in mining sector (esp. metal ores)
–
Main trading partners (RUS, SWE) not in EU 18
+
Sound public finances
–
Less transit trade in Russian goods expected
+
Potential revenue from privatisation
–
High costs of imported energy
+
Political stability
–
Costs of healthcare and pensions
–
Non-fulfilment of Maastricht criteria
Source: NORD/LB Fixed Income Research
Comment – Bond market
Finland is acting very cautiously with regard to both the economic outlook and issuance
activity. Finnish government bonds are a sound investment of limited liquidity in the AAA
segment. One problem in our opinion is that Finland only focuses on two maturities (5y
and 11y), which means that not all sections of the curve are consistently covered by
benchmark bonds.
Ireland
Star pupil achieves trend reversal
Ireland is divided into two
NUTS 2 regions and eight
NUTS 3 regions:
With GDP of EUR 185.4bn in 2014 (2013: EUR 174.8bn), Ireland accounts for around
1.7% of the eurozone’s economic output. As early as the 1960s, the Irish government
started to systematically attract foreign businesses (Industrial Development Agency;
IDA), with a focus even then on building up export-oriented industries. In 1973, Ireland
joined what was then the EC and has benefited from extensive grants ever since. In
addition to establishing itself as a production and distribution location for US and British
companies, Ireland obtained its economic power from the targeted expansion of its financial sector. When the property bubble burst in 2008, at EUR 1,400bn the balance
sheet totals in the banking sector were some seven times larger than national GDP at
the time. Following the establishment of a state bad bank, the National Asset Management Agency (NAMA) and the associated expenses incurred by the Irish government, a
debt situation occurred within the space of a few years (new debt totalling 32.5% of GDP
in 2010) which made independent funding by Ireland in the markets impossible (2013
aggregate indebtedness: 132.2%). After comprehensive reforms as part of the European
bailout (more flexible employment market as a result of a relaxation of the protection
against unfair dismissal, simplification of the minimum wage system, increase in the
pension age to 68, recapitalisation of banks and further spending cuts in the public sector budget), a marked positive trend has been evident since 2013. At 4.8% of GDP,
Ireland’s economy grew faster in 2014 than that of any other European country. Growth
was primarily attributable to the substantial trade surplus (chemical products (SITC 5;
especially pharmaceutical products, which account for more than half of all exports,
making Ireland the no. 1 worldwide in this sector)), with significant growth in domestic
demand at the same time. The most important trading partners by far are the US and the
UK, both of which also lead the field in terms of direct foreign investment in Ireland.
[IE01] Border,
Midland and Western:
[IE011] Border
[IE012] Midland
[IE013] Western
[IE02] Southern and Eastern:
[IE021] Dublin
[IE022] Mid East
[IE023] Mid West
[IE024] South East (IE)
[IE025] South West (IE)
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Industry (except construction)
2 Public admin, educ., human health, social
3 Trade, transport, accomodation, food serv.
4 Financial and insurance activities
5 Information and communication
6 Professional, scientific, technical activities
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
4.6
69,797
185.4
Value
26.3
17.8
15.6
10.1
9.0
21.3
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Medicinal and pharmaceutical products
6.1%
28.2%
1 USA
22.6%
Organic chemicals
3.0%
23.0%
2 United Kingdom
14.8%
Essential oils, resinoids and perfume materials; toilet, polishing
1.5% and cleaning
8.8% preparations
3 Belgium
13.5%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
6.9%
8
4 Germany
6.4%
Professional, scientific and controlling instruments and apparatus,
2.3%
n.e.s.
5.1%
5 Switzerland
6.0%
Office machines and automatic data processing machines
2.1%
4.8%
6 France
5.3%
Chemical materials and products, n.e.s.
2.3%
4.0%
7 Netherlands
3.9%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 2.5%
parts thereof8(including
Spain non-electrical counterparts, n.e.s.,
2.8%
of electrical household-type
Crude materials
3.0%
2.4%
9 Italy
2.4%
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
1.9%
n.e.s. 10 Japan
2.0%
Value
7.29
36.368
3.206
-1.588
2.934
1.858
-10.156
15.37
-11.299
-2.93
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
10.8%
1 United Kingdom
38.7%
Medicinal and pharmaceutical products
4.9%
9.8%
2 USA
10.8%
Office machines and automatic data processing machines
2.9%
6.6%
3 Germany
8.6%
Organic chemicals
3.0%
6.5%
4 Netherlands
6.3%
Road vehicles (including air-cushion vehicles)
8.0%
5.5%
5 China
4.3%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
5.3%
8
6 France
3.7%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 4.7%
parts thereof7(including
Japan non-electrical counterparts, n.e.s.,
2.8%
of electrical household-type
Machinery specialized for particular industries
1.7%
4.7%
8 Belgium
2.7%
Articles of apparel and clothing accessories
3.2%
3.6%
9 Switzerland
2.4%
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
3.0%
n.e.s. 10 Norway
1.8%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Outside of greater Dublin,
Ireland’s economy remains
weak
The regional economic differences are substantial. The majority of Ireland’s economic
output (82.0%) is generated in the South West [IE02]. Dublin, the capital region [IE021],
accounts for half of regional GDP alone. In geographic terms, the chemical industry
among others is centred on Cork [IE025]. Only 18.0% of Ireland’s economic output is
generated in Border, Midland and Western [IE01]. In 2009, a major US company closed
its facility in Limerick [IE02] and relocated its manufacturing to Poland. Goods are exported from Ireland primarily by ship via Antwerp. The most important airports are Dublin
and Cork. Natural gas reserves were discovered off the south coast of Ireland in 1978,
but traditionally Ireland is a net energy importer (85% of energy needs). Raw materials,
energy, machinery, vehicles and aircraft all have to be imported.
National Treasury
Management Agency (NTMA)
and National Asset
Management Agency (NAMA)
Since 1990, the NTMA has functioned as the Irish finance agency. To combat the fallout
of the financial market crisis, NAMA was established as a bad bank in December 2009.
NAMA took on critical land and development loans, as well as business loans, and issued state-guaranteed securities in their stead. A second bad bank, the Irish Bank Resolution Corporation (IBRC; 2011 to 2013), took on the distressed assets of the Anglo Irish
Bank and Irish Nationwide Building Society. Up until the financial crisis, Ireland itself
focused on traditional money market and capital market paper (T-bills, Govt bonds). Its
access to the capital market was then blocked from January 2010 onwards. It took until
January 2013 for Ireland to make a comeback with a EUR 2.5bn syndicated tap issue of
IRISH 5½ 10/18/17. One year later, in January 2014, the issue of a new ten-year bond
(IRISH 3.4 03/18/24; EUR 3.75bn) followed that until now was tapped to EUR 8.14bn.
According to information from the Irish Finance Agency NTMA, the majority of investors
are based outside the eurozone.
EUR bonds Ireland (EURbn) – Maturity profile
Ratings Overview
Moody’s
S&P
Outlook
A-
Positive
Baa1
Stable
A+
Stable
Last updated: 20 August 2015
70
60
Amount Outstanding (EURbn)
Fitch
LT
50
40
30
20
10
0
IRTB
IAB
Bilateral
EFSF
IMF
EFSM
VRB
FRB
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
>2025
1.0
1.4
0.0
0.0
0.0
0.0
1.7
2.4
0.7
0.7
5.0
2.5
0.0
3.3
0.0
3.7
3.9
3.7
0.0
3.7
0.0
3.1
3.0
2.2
10.2
6.4
9.3
14.5
20.9
0.0
18.4
1.2
0.0
0.4
0.0
0.8
5.0
6.6
0.0
0.0
9.8
25.0
11.7
Source: Bloomberg, NORD/LB Fixed Income Research
Comeback to the primary
market
In government bonds, Ireland currently offers a volume of EUR 124.4bn (IRISH), as well
as EUR 1.0bn in the form of Treasury bills (IRTB). The average coupon on the bonds
stands at 4.76% and the average residual maturity is 25.4 years. Maturities are clustered
beyond 2025. According to the local central bank, foreign investors no longer hold 72.2%
of Irish government bonds, which was the case as at year-end 2012. As at September
2014, only 52.7% were held by foreign investors. This means that the ratio of foreign to
domestic bondholders has decreased to be almost level. The NTMA website provides an
overview of all loans across the maturities spectrum. According to this overview, the IMF
(EUR 4.4bn), EFSF (EUR 18.4bn), EFSM (EUR 22.5bn) along with the UK, Sweden and
Denmark (EUR 4.9bn) have granted a total amount of EUR 50.2bn. The investor presentation January 2015 provides an up-to-date overview of the status of Ireland’s capital
market suitability.
Ireland is once again
represented in the
investment grade segment
without restriction
With the upgrade by Moody’s from Ba1 to Baa3 (17 January 2014) and then to Baa1 (16
May 2014), Ireland was returned to the investment grade universe by all three major
agencies. This is important because it helps the country reach other investor groups that
are subject to stricter requirements. S&P has given the country an A+ rating and Fitch
affirmed an A- rating.
Maturity
1, 3, 6, 9, 12m
Security
Irish T-Bills; IRTB
Security
FRB; IRISH
Irish Govt Bonds:
Fixed Rate Bond (FRB) *
Maturity
15, 20, 25, 30, 35Y
Day count
act/act
Cpn frequency
discounted
Issuance
occasionally
Day count
act/act
* Name according to daily Irish Govt
bonds outstanding report
Little attention is still paid to
variable rate bonds (VRB)
Cpn frequency
annual
Issuance
occasionally
Coupon type
fix (sinkable)
Cpn frequency
annual
Issuance
20/9/12, 18/1/13
Ten bonds are amortising bonds (EUR 1.1bn), which mature between 2027 and 2047. In
addition to annual coupon payments, a pro rata redemption is carried out each time, so
that investors receive the same level of cash flow each year. Five bonds were issued on
20 September 2012 and 18 January 2013 respectively.
Security
VRB; IRISH
Irish Govt Bonds:
Variable Rate Bond (VRB)*
Coupon type
fix
There are 32 Irish government bonds currently placed in the market, of which 12 are
classic fixed rate (benchmark) bonds (FRB; EUR 99.2bn). All other variants (IAB; VRB)
have arisen as a result of the financial crisis.
Security
IAB; IRISH
Irish Govt Bonds:
Irish Amortised Bond (IAB)*
Maturity
25Y to 40Y
Coupon type
zero
Irish treasury bills are zero coupon bonds, which are placed with maturities of between
one and twelve months, generally by auction. A volume of EUR 1.0bn is in issue at the
moment and is attributable to two bills of EUR 500m each.
Irish T-Bills (IRTB)
Maturity
>1Y
Day count
act/act
Day count
act/act
Coupon type
FRN (EUR006M)
Cpn frequency
semi-annual
Issuance
8/2/2013
There are eight FRN which have a total volume of around EUR 24.0bn and are linked to
the 6M-Euribor. The bonds were issued on 8 February 2013 and mature between 2038
and 2053. These variable rate bonds replaced promissory notes, through which the
government was originally liable for a total sum of EUR 31bn, which arose following the
takeover of debt from the Anglo Irish Bank and Irish Nationwide. For Ireland, the switch
from promissory notes to these long-term floaters meant a significant interest rate advantage.
These VRB (average residual maturity: 30.7 years) are still held by the Central Bank of
Ireland (CBI). In its Transaction Overview in February 2013, the CBI promised to sell
“the bonds as quickly as possible” at market conditions, but only if permitted by financial
market stability. The CBI intends to sell VRB amounting to EUR 0.5bn each year from
2015 to 2018. From 2019 onwards, the volume is set to rise to EUR 1.0bn each year,
which will be maintained until 2023. From 2024 onwards, the volume on the agenda is
EUR 2.0bn each year until the total sum of EUR 25bn has been sold by 2032. In our
opinion, it is extraordinary that the CBI is being allowed to retain these portfolios on its
books for so long. However, the ECB has not called for a faster sale to date.
3
3
2
2
1
1
0
0
-1
06.2014
08.2014
3 Yr
10.2014
4 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
12.2014
5 Yr
02.2015
7 Yr
04.2015
10 Yr
06.2015
30 Yr
-1
08.2015
Yield (%)
Yield (%)
Irish Govt Bonds –Yields (%)
Having started with a ratio of general government debt to GDP of 24.9% in 2007, Eurostat shows that this ratio rose to 123.7% of GDP in 2013. At -7.2% of GDP (2012: 8.2%), net lending also remained very high (chart left). However, Ireland was able to exit
the EFSF financial assistance programme in 2013 and has since had access again to
the financial markets. The positive development is reflected in the total debt figure
(109.7% of GDP in 2014) and net lending (-4.1% of GDP in 2014). The forecast for 2015
as a whole was slightly revised upwards in the first quarter of this year, with growth
equating to 3.8% of GDP now expected.
Ireland reverses the
sovereign debt trend
Gross debt vs. budget balance (%)
Total revenue vs. total expenditure (EURbn)
120
130
5
120
0
100
110
100
-5
80
90
-10
80
60
70
-15
60
50
-20
40
40
-25
30
20
20
-30
0
10
2005
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
-35
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
2013
2014
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
Only around 37% of revenue
stems from direct taxes
At EUR 64.7bn, Ireland’s revenue rose in 2014 (2013: EUR 60.9bn) to its highest level
since 2008 (EUR 63.4bn). It is positive to note that social contributions climbed again to
EUR 10.8bn (2013: EUR 10.3bn) as a result of the strong trend in the labour market
(average rate of unemployment of 11.2% in 2014, with a marked downward trend). Taxes on income and wealth also increased to EUR 25.2bn (2013: EUR 23.2bn). With a rise
to EUR 20.7bn, the development in taxes on production and imports (2012: EUR
18.0bn) is also pleasing, although the best result in the period under review (2007: EUR
25.4bn) is considerably higher.
Payable interest climbs to
10.5% of total expenditure
Overall, expenditure has significantly outstripped income since 2008 (chart right), with
the rate of growth in income considerably slower than that of expenditure. In 2014, expenditure rose slightly from EUR 71.1bn in 2013 to EUR 72.3bn. This development was
primarily driven by an increase in other expenditure of approx. EUR 1.4bn to EUR
16.6bn, which nevertheless means that the figure remained significantly below the record figure in this time series (2010: EUR 24.5bn). The trend in all other items was
steady. Payable interest, which accounted for around EUR 7.5bn in 2014 (2013: EUR
7.6bn), was slightly reduced as a result of the low for long interest rate situation. There
was little change in social benefits and social transfers (EUR 28.5bn; 2012: EUR
28.6bn), which represented around 41% of all expenditure. Compensation of employees
reduced slightly to EUR 18.6bn (2013: EUR 18.7bn). In 2010, the costs incurred by the
Irish government for rescuing the banks had risen so sharply that capital transfers
soared from EUR 5.7bn (2009) to EUR 32.9bn (2010), (chart right, orange). Revenue of
around EUR 55bn was countered at the time by expenditure of EUR 103.4bn. Consequently, the budget balance in 2010 reached a record -31.0% of GDP (chart right). In
2014, capital transfers amounted to just EUR 1.2bn.
Comment – Public finances
Unlike other countries receiving bailouts, Ireland again generated a high current account
surplus of EUR 7.3bn in 2014 as a result of its strength in exports. After slumping in
2007/2008, the trade surplus also reached the high level of EUR 36.4bn in 2014. Additionally, the Irish economy is clearly back on course for growth. In 2014, the country had
the fastest growing economy. Nevertheless, it seems judicious in the long term to reduce
the predominance of pharmaceutical products in terms of exports by expanding other
sectors. An increase in business taxes may further enhance the revenue situation, although the potential impact on the all-important FDI for Ireland must be taken into account. Within the eurozone, Ireland’s domestic market is comparatively insignificant. This
is why foreign direct investment has traditionally been of immense importance. Throughout the crisis, Ireland has defended its appeal as a location for British and US companies, not least because it continues to forgo corporation tax revenue.
Strengths & opportunities
Weaknesses & risks
+
Financials, pharmaceuticals
–
Dependency on FDI from the UK and USA
+
Traditionally with a trade surplus
–
High deficit, high payable interest
+
Attractive location for FDI
–
Tax-to-GDP ratio: Ireland ranked 15 in EU 18
+
Redemption of debt shifted into the far distant
future
–
Low risk premium compared with AA and AAA rated
peers
+
Successful return to primary market
–
Dependency on foreign investors
+
Investment grade rating from all 3 agencies
–
Weak real estate sector
+
Expatriates are increasingly returning home
th
Source: NORD/LB Fixed Income Research
Comment – Bond market
In recent years, Ireland has recovered enough for investors to rediscover their interest in
its government bonds in the primary market as well. The country’s progress is remarkable and has hastened its return to the investment grade segment. However, we consider
the substantial difference between Irish risk premiums and those for Italy and Spain as
excessive. The conversion of loans into EUR 25bn floaters (VRB) reduces Ireland’s interest burden by around EUR 1bn per annum, which is positive in principle. However, the
fact that the redemption of most of the debt has been shifted into the far distant future is
a concern.
Greece
The eurozone's problem child
Greece is divided into four
NUTS-1 regions and 13
NUTS-2 regions:
Greece's economic growth reveals a gloomy picture. Its (provisional) GDP was EUR
179.1bn in 2014, almost as low as 2003 (EUR 178.6bn). Recession has been the order
of the day since the financial and economic crisis started in 2008, when Greece was still
able to post GDP of EUR 242.1bn. In October 2009 the social-democratic head of government at the time, Giorgos Papandreou, revealed the disastrous budget situation.
Since the state was no longer able to obtain funding on the financial markets, loans from
the eurozone and the IMF (first bailout package: EUR 73bn) prevented the country from
becoming insolvent. In return, the government of the day agreed to implement a wideranging austerity programme. When it turned out that Greece, then deeply mired in crisis, needed further funding, a second bailout package of EUR 173.2bn was provided by
the EFSF (European Financial Stability Facility) and the IMF in July 2011. Of this
amount, Greece made use of EUR 142.7bn. The replacement of Papandreou by the
financial expert Loukas Papadimos in November 2011 brought only temporary easing.
With the opinion of the general public split, political stalemate ensued, leading to another
transitional government in 2012. Antonis Samaras, prime minister for two and a half
years, failed in the presidential elections brought forward to the end of 2014. The austerity policy and the weak economic situation in Greece resulted in the political extremes
gaining a large number of votes. Greece has recently been governed by a coalition of
the left-wing alliance (SYRIZA party) and the right-wing populist ANEL party, which resigned in August 2015. Greece's main trading partners on the export side were Turkey
and Italy in 2014. The country obtains most of its imports from Russia and Germany. A
look at the NUTS-1 regions in Greece indicates that the capital Athens [EL3] accounts
for the biggest share of Greek GDP, at over 40%. The conurbation is very much dominated by the tertiary sector (services). It also has the Port of Piraeus, Greece's gateway
to world trade. The second-strongest economic region is Northern Greece [EL1] at
24.7%, followed by Central Greece [EL2] at 17.4%. The tourist hotspots Aegean Islands
and Crete round off the GDP with a share of 9.7%.
[EL1] Voreia Ellada:
[EL11] Anatoliki Makedonia, Thraki
[EL12] Kentriki Makedonia
[EL13] Dytiki Makedonia
[EL14] Thessalia
[EL2] Kentriki Ellada:
[EL21] Epirus
[EL22] Ionische Inseln
[EL23] Westgriechenland
[EL24] Mittelgriechenland
[EL25] Peleponnes
[EL3] Attiki
[EL30] Attiki
[EL4] Nisia Aigaiou, Kriti:
[EL41] Voreio Aigaio
[EL42] Notio Aigaio
[EL43] Kriti
Country Profile
Value
1 Population (Mln. inhabitants)
10.9
2 Area (sq. km)
131,957
3 Gross Domestic Product (EURbn)
179.1
Gross value added by sectors (%)
Value
1 Trade, transport, accomodation, food serv.
22.7
2 Public admin, educ., human health, social
21.6
3 Real estate activities
16.7
4 Industry (except construction)
14.6
5 Arts, entertainment and recreation; other service activities
4.9
6 Financial and insurance activities
19.4
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
1.36
-17.228
16.942
10.279
6.538
0.125
-3.607
2.404
-5.941
0.678
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Petroleum, petroleum products and related materials 5.5%
38.0%
1 Turkey
13.0%
Food, beverages and tobacco
9.0%
16.2%
2 Italy
9.7%
Non ferrous metals
1.8%
6.0%
3 Germany
7.0%
Crude materials
3.0%
5.1%
4 Bulgaria
5.6%
Medicinal and pharmaceutical products
6.1%
3.9%
5 Cyprus
5.3%
Articles of apparel and clothing accessories
2.1%
2.7%
6 United Kingdom
3.9%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
2.5%
8
7 Saudi Arabia
3.1%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 2.3%
parts thereof8(including
USA
non-electrical counterparts, n.e.s.,
3.1%
of electrical household-type
Iron and steel
2.9%
2.0%
9 Egypt
3.0%
Manufactures of metals, n.e.s.
3.1%
1.8%
10 Macedonia
2.8%
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
30.9%
1 Russia
10.1%
Food, beverages and tobacco
8.6%
11.8%
2 Germany
10.1%
Medicinal and pharmaceutical products
4.9%
5.6%
3 Iraq
8.2%
Other transport equipment; confidential traffic of section 3.0%
7
4.7%
4 Italy
8.0%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
3.1%
8
5 China
5.2%
Crude materials
4.3%
3.1%
6 Kazakhstan
5.1%
Road vehicles (including air-cushion vehicles)
8.0%
3.0%
7 Netherlands
5.0%
Articles of apparel and clothing accessories
3.2%
2.9%
8 France
4.6%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 2.4%
parts thereof9(including
Spain non-electrical counterparts, n.e.s.,
3.4%
of electrical household-type
Non ferrous metals
2.1%
2.1%
10 Bulgaria
3.2%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Third bailout package for
Greece
The climax to the Greece crisis so far has been the expiration of the second bailout
package on 30 June 2015. For the first time, Greece was unable to service an instalment
amounting to around EUR 1.6bn for the IMF loan. This resulted in capital controls and a
one-week closure of the stock market and banks. Tsipras then let the Greek people vote
in a referendum on the reforms proposed by the country's international creditors. Despite
a "No" vote, his controversial finance minister Yanis Varoufakis subsequently resigned.
In a special session held on 19 August 2015, the German Bundestag decided on a further aid package for Greece, despite some opposing votes. However, Finance minister
Schäuble made it clear that this would only be implemented with the involvement of the
International Monetary Fund, which is critical of any further aid programme. The new
financial assistance has a term of three years and is worth EUR 86bn. Most of this
amount (approx. EUR 50bn) is earmarked for debt rescheduling. A further EUR 25bn is
available to stabilise the Greek banking sector.
Prime minister Tsipras
resigns
New elections are again on the agenda in Greece. The Tsipras administration is resigning after not even seven months in office. The prime minister was able to secure the
country's long-term financing during long and tough negotiations with its creditors.
Tsipras only managed this because he received the support of the opposition in parliament. The left-radical Syriza wing led by Panagiotis Lafazanis has turned away from its
own head of government. This makes it almost impossible to implement the reform programme, since Tsipras does not have an absolute majority and the Greek opposition
does not want to follow his line over the long term. With this resignation, it means a
political stalemate is once again likely to hang over Greece for the next few months.
Fresh elections have been scheduled for 20 September. Alexis Tsipras is aiming to
assert his position with a revised election list – without disruption from his own camp.
Residual term to maturity of
the Greek bond portfolio is
15.4 years
The website of the Greek financial agency PDMA (Public Debt Management Agency)
clearly reflects the country's situation on international capital markets. For example, this
year too there are still no definitions of the financial instruments ('Under Construction').
Some information has also not been updated for quite a long time. According to PDMA,
the percentage of T-bills in the ongoing funding of the country from January to June
2015 was 100.0%. PDMA figures indicate that the volume-weighted residual term to
maturity of Greek government bonds rose from 6.3 years (2011) to 15.4 years. Greek
debt securities are traded through the HDAT system, which is operated by the Bank of
Greece. In the chart, the loans granted by eurozone member states, the European
Commission and the IMF (as shown in Bloomberg) are inserted as Loan (red).
Rating agencies Fitch and
Standard & Poor’s raise
Greece's credit rating
When European creditors reached a debt comprise agreement with Athens in mid-July,
S&P upgraded Greece's credit score. The country's rating went up from CCC- to CCC+.
The bonds nevertheless remain high risk. The probability of Greece leaving the eurozone is now less than 50%, according to S&P estimates. Fitch also sees a lower risk of
sovereign default. While the agreement on a third bailout package is positive, high risks
nonetheless remain, according to the rating agency Fitch. Greece's credit rating was
raised to CCC.
EUR bonds Greece (EURbn) – Maturity profile
Ratings Overview
Moody’s
S&P
Outlook
B
Stable
Caa3
Stable
B-
Stable
Last updated: 20 August 2015
Amount Outstanding (EURbn)
Fitch
300
LT
250
200
150
100
50
0
GREECE - FIXED
GTB - ZERO COUPON
GGB - VARIABLE
GGB - ZERO COUPON
GGB - STEP CPN
GGB - FLOATING
GGB - FIXED
Loan
2015
2016
13.2
3.0
2017
2018
2019
0.0
2020
2022
2023
2024
2025
>2025
1.5
62.4
8.0
1.8
0.1
2.3
5.0
0.0
7.3
0.0
1.9
Source: Bloomberg, NORD/LB Fixed Income Research
0.7
9.8
1.4
1.3
1.8
1.7
24.3
1.3
10.2
0.0
1.2
183.8
Maturity
4, 52w
13, 26w
Security
GTB
GTB
Day count
act/360
act/360
Coupon type
zero
zero
Cpn frequency Issuance
discounted
occasionally
discounted
once a month
Hellenic Republic
Treasury Bills (GTB)
In the past, Hellenic Republic Treasury Bills have been issued once a month with maturities of 13 or 26 weeks. In 2015, ten GTBs have already been issued by the start of
August, collectively accounting for a volume of EUR 14.8bn.
Maturity
up to 30Y
10Y to 30Y
up to 30Y
Day count
act/act
act/act
act/360
Security
GGB
GGB
GGB
Coupon type
fix
step coupon
FRN (EUR006M)
Cpn frequency
annual
annual
annual
Issuance
occasionally
25/2/2012
occasionally
Hellenic Republic
Government Bonds (GGB)
The issue of GGB 4 3/4 04/17/19 (EUR 3bn; now increased to EUR 4.0bn) marked the
successful return to the primary market. Hellenic Republic Govt Bonds (GGB) are currently in circulation with a total volume of EUR 127.3bn. Of that amount, fixed-interest
(27 securities) only make up around EUR 26.4bn. There are also 21 stepped coupon
bonds, which were created through the debt restructuring of the government bonds
issued under Greek law on 25 February 2012. Five floaters represent a volume of EUR
0.9bn. Four variable interest bonds and a zero-coupon bond (EUR 8bn) round off the
outstanding volume.
Maturity
20, 30Y
50Y
Day count
act/act
act/act
Security
GREECE
GREECE
Hellenic Republic Govt
International Bond (GREECE)
Coupon type
fix
FRN (CPTFEMU)
Cpn frequency
annual
annual
Issuance
occasionally
30/3/2007
Of the eleven Hellenic Republic Government International Bonds (GREECE), four are
denominated in euro (EUR 1.5bn). GREECE 2.085 07/25/57 (EUR 1.0bn) is linked to
the performance of the harmonised European consumer price index ex tobacco
(Bloomberg: CPTFEMU), while the other three are fixed interest. The rest of the bonds
are denominated in JPY.
60
60
50
50
40
40
30
30
20
20
10
10
0
06.2014
08.2014
3 Yr
10.2014
5 Yr
12.2014
10 Yr
02.2015
15 Yr
04.2015
20 Yr
06.2015
Yield (%)
Yield (%)
Greek Govt Bonds –Yields (%)
0
08.2015
30 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
Greece trails behind the
eurozone
With a national debt of 177.1% of GDP, Greek KPIs continue to be incredibly poor,
bringing up the rear of eurozone member states. In contrast, the budget balance has
improved significantly from -12.3% of GDP (2013) to -3.5% of GDP (2014). This is also
the best figure in the past ten years. Since Greece joined the eurozone, new borrowing
has always been higher than the -3.0% of GDP as stipulated by the Maastricht criteria.
Accordingly, for economic reasons the country should not have been admitted to the
eurozone. The strong performance of the budget balance is due in particular to the intensive efforts made to consolidate the budget.
At EUR 82.0bn (2013: EUR 87.1bn), revenue fell in 2014 to the lowest level since 2005.
In the period covered by the review, the highest figure was EUR 98.4bn (2008). Social
contributions (at that time: EUR 30.7bn) in particular made up a large percentage of that
total. Compared with this figure, the EUR 24.0bn received in 2014 is extremely low.
Taxes on income and wealth also saw took a step backwards. In 2013, they had generated EUR 18.7bn; in 2014 this figure fell further, to EUR 16.8bn. Taxes on production
and imports rose year-on-year (2013: EUR 25.4bn) in 2014 to EUR 27.6bn. However,
the biggest loss was posted by other revenue. In 2014 this item was only EUR 13.6bn,
around 27% less than in the previous year.
Greek revenue is continuing
to shrink
Gross Debt vs. Budget Balance (% of GDP)
Total Revenue vs. Total Expenditure (EURbn)
140
180
0
160
-2
140
120
-4
100
-6
80
120
100
-8
60
80
-10
40
60
-12
40
20
-14
20
0
2006
0
2007
2008
2009
2010
2011
2012
2013
2014
-16
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
2013
2014
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
Total expenditure – lowest
level in ten years
Total expenditure amounted to EUR 88.4bn in 2014, a historic low for Greece since the
start of the financial and sovereign debt crisis. Capital transfers accounted for the largest
proportion of the decline. This item, EUR 23.4bn in 2013, was reduced to only EUR
1.9bn in 2014. Compensation of employees remained relatively constant at EUR 21.5bn
(2013: EUR 21.9bn). Monetary social benefits also fell only marginally, to EUR 37.8bn in
2014. Interest payable totalled EUR 7.0bn (2013: EUR 7.3bn). Other expenditure increased on the other hand in 2014, by around EUR 1.5bn to EUR 20.2bn.
Privatisation: sale of Port of
Piraeus on the agenda
Following the change of government at the start of 2015, prime minister Tsipras initially
stopped all privatisation projects that had been initiated by the Samaras administration.
As early as May of this year, Reuters news agency reported on Tsipras' willingness to
sell the port in Piraeus after all. Under the terms of the third bailout programme, the
Greek state is required to sell off the family silver in return for further financial support.
Athens has until the end of October to invite offers for the ports of Piraeus and Thessalonica. The Chinese state-owned company Cosco, which already holds a stake in the
Port of Piraeus, is probably interested in a majority shareholding, in addition to two other
companies. Some regional airports are also to be put up for sale.
Comment – Public finances
So far, Greece has not presented any convincing proposal for reducing its national debt.
Although Greece remains very popular as a tourist destination, the inefficiencies in tax
collection are still very obvious. The prescribed radical cure is likely to have a positive
impact only over the long term. Due to rising social security costs resulting from the
crisis, we believe there is only a low chance of reducing expenditure in the way that is
proposed. The crucial factor will nevertheless be whether the country succeeds in
achieving the objectives specified in the reform programme. If even the previous privatisation proceeds do not stand up to the current legal review, the non-material damage is
greater than the material damage. The political situation in Greece is unpredictable. The
surprising resignation of Varoufakis and the loss of the government majority for Tsipras
in the vote on the new austerity programme mean that the country is again facing fresh
elections. Lenders want to see progress by the end of October in the reforms that
Greece had promised them. In other words, a new government must be formed by then
and a reform package must have been passed in parliament. It could be implied that
Tsipras is demonstrating far-sightedness and cleverness by holding the elections
promptly after passing the third bailout package. He enjoys a high degree of popularity
among the general public and governing without the party's own majority is difficult. If his
assumed plan to secure his policy on a solid foundation does indeed work out, this could
mean more security for Greece's creditors. However, financial markets initially reacted to
the resignation with scepticism. It remains open to question whether a third package in
the billions of euro and the associated creditor agreements will really push the country
and its economic development forward, or whether it will remain a bottomless pit for
European taxpayers.
Strengths & opportunities
Weaknesses & risks
+
Interest burden down due to debt haircut
–
Shattered state finances
+
Shipping, tourism
–
No proposal in place for reducing debt
+
Loan repayments deferred until far in future
–
Restrictive lending to private sector
+
Successful return to primary market
–
Tax evasion, corruption
+
Relatively high absolute risk premium
–
Privatisation proceeds disappointing
–
Political instability
–
Non-Investment-Grade-Rating
Source: NORD/LB Fixed Income Research
Comment – Bond market
The fact that Greece has now been able to obtain funding again on the normal capital
markets is to be welcomed. We believe that, by regaining a presence on the primary
market, the country can allocate the risks where they belong, without burdening eurozone taxpayers with them. In the past few years, investors have had sufficient opportunity to form an impression of Greece's real creditworthiness. As a result, they are in a
better position than at the start of the financial crisis to decide whether they wish to invest in Greek bonds, which are rightly still only regarded as high-yield investments. Investment-grade conditions, which the country had enjoyed for a long time, have not been
justified at any time. The permanent political unrest and the poker game in the first half of
2015 have once again cost a lot of time that could have been used for the necessary
reforms. At present, Greece can only finance the running of the country through bailout
packages provided by the Troika and through T-bills.
Portugal
Portuguese lead the field in renewable energies
Portugal is divided into
three NUTS 1 regions and
seven NUTS 2 regions:
Due to globalisation, Portugal has faced growing international competition as a business
location over the last ten years. Following accession to the European Community in
1986 and the associated fund inflows from what was then the EC, substantial improvements were initially made to industry and infrastructure. However, general government
debt successively increased in the wake of the economic and financial crisis, with the
result that Portugal had to be bailed out and it received financial assistance from the EU
Commission, European Central Bank and IMF (troika) totalling EUR 78bn in 2011. In
return, the government undertook to limit any new budgetary debt - the target for 2015 is
new debt of less than three per cent - and agreed to reforms aimed at improving its
competitiveness (structural reforms) and strengthen sustainable growth. Portugal's gross
domestic product amounted to EUR 173.0bn in 2014, which is the third increase in a row
(2013: EUR 169.4bn; 2012: EUR 168.4bn). Looking at the seven NUTS 2 regions, it is
clear that Lisbon [PT17] contributes the largest share to Portugal's economic output at
37.1%, and alongside Porto [PT11] it represents the most important conurbation in Portugal. Together with Norte [PT11; 28.4%], Centro (PT) [PT16; 18.5%] and Alentejo
[PT18; 6.5%], these four regions account for more than 90% of the country's output. The
regions Algarve [PT15; 4.2%], Madeira [PT30; 3.0%] and the Azores [PT20; 2.2%],
which primarily depend on tourism, complete the GDP with a share of almost 10%. Foreign trade is dominated by machinery and transport equipment (SITC 7), but overall
around 60% of exports are in the low tech segment. For instance, Portugal is the world
market leader in the cork industry. The paper, cellulose, clothing, leather and textiles
industries are also of importance. Spain is the most major trading partner, followed by
Germany and France. These three countries also lead the way in foreign direct investment in Portugal. Car makers carry out manufacturing primarily in the area around Setúbal (Palmela, Cacia) in the Lisbon region [PT17].
[PT1] Continente:
[PT11] Norte
[PT15] Algarve
[PT16] Centro (PT)
[PT17] Lisboa
[PT18] Alentejo
[PT2] Região Autónoma dos Açores
[PT20] Açores
[PT3] Região Autónoma da Madeira
[PT30] Madeira
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Trade, transport, accomodation, food serv.
2 Public admin, educ., human health, social
3 Industry (except construction)
4 Real estate activities
5 Professional, scientific, technical activities
6 Financial and insurance activities
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
10.4
92,225
173.0
Value
25.4
20.1
18.9
10.2
6.5
19.0
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Food, beverages and tobacco
9.0%
11.1%
1 Spain
24.2%
Road vehicles (including air-cushion vehicles)
10.8%
10.3%
2 France
12.0%
Petroleum, petroleum products and related materials 5.5%
8.0%
3 Germany
12.0%
Articles of apparel and clothing accessories
2.1%
5.9%
4 Angola
6.8%
Crude materials
3.0%
5.2%
5 United Kingdom
6.2%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 5.0%
parts thereof6(including
USA
non-electrical counterparts, n.e.s.,
4.5%
of electrical household-type
Manufactures of metals, n.e.s.
3.1%
4.3%
7 Netherlands
4.1%
Footwear
0.8%
4.0%
8 Italy
3.3%
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
4.0%
n.e.s.
9 Belgium
2.8%
Paper, paperboard and articles of paper pulp, of paper or1.6%
of paperboard
3.6%
10 China
1.8%
Value
0.85
-7.108
9.925
6.13
2.313
1.48
-3.604
1.273
-0.942
-2.48
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
13.5%
1 Spain
32.7%
Food, beverages and tobacco
8.6%
13.0%
2 Germany
12.4%
Road vehicles (including air-cushion vehicles)
8.0%
9.4%
3 France
7.1%
Crude materials
4.3%
4.5%
4 Italy
5.3%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 4.3%
parts thereof5(including
Netherlands
non-electrical counterparts, n.e.s.,
5.1%
of electrical household-type
Medicinal and pharmaceutical products
4.9%
3.7%
6 United Kingdom
3.1%
Articles of apparel and clothing accessories
3.2%
3.3%
7 Angola
2.7%
Gas natural and manufactured
3.0%
3.1%
8 China
2.7%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
3.0%
8
9 Belgium
2.7%
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
3.0%
n.e.s. 10 USA
1.6%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
Mineral oil reserves
discovered in Portugal
Once again, mineral oil and mineral oil products accounted for the largest share of Portugal's imports in 2014, but they could be lower in future. According to reports in the
Portuguese weekly newspaper Sábado, substantial mineral oil reserves (at least one
billion barrels) have been discovered in the Province of Alentejo and in deep water off
the coast. In addition, natural gas reserves worth around a quarter of Portugal's economic output have also apparently been discovered. Many questions are still unanswered
however, and the Portuguese Ministry of Energy and the Environment remains tight
lipped about the subject. All that has been confirmed is that there have been talks with a
British company specialising in satellite remote sensing of mineral oil/natural gas reserves. The Ministry stated that no-one had been commissioned explicitly to conduct the
search. It remains to be seen if, or when, the government decides to extract these natural resources, especially against the backdrop of the current low global market prices.
Portuguese impress in field
of renewable energies
After adjustments for weather-related outliers, the share of renewable energies in electricity consumption climbed by two percentage points to 55.4%. Its share of final energy
consumption recently stood at 27% (2013). This means that despite the austerity
measures since 2012, the targets Portugal set itself for the use of this energy source for
2020, is tangibly close. The country's aim is for renewable energies to make up between
31% (minimum) and 34.5% (maximum) of final energy consumption as well as 60% of
electricity consumption. Since the start of 2015, households and businesses have been
permitted by law to produce electricity that is used exclusively for their own requirements. This should provide fresh impetus to boost the expansion of this energy source
in particular. More hydroelectric power plant and wind farms are set to join the grid either
this year or next. Given the pump storage capacity available, this type of power plant is
particularly dominant. The licences for the wind power turbines currently being implemented stem from earlier government tenders. No public requests for tender regarding
additional capacity are expected for the time being, although the situation could change
again after 2020. Alongside the targets for 2030 (renewable energies account for 40% of
final energy consumption), in 2025 renewable energies are set to replace two coal-fired
power plants which are set to be decommissioned.
Financial Assistance
Programme ended on
17 May 2014
The IGCP (Instituto de Gestão do Credito Público) acts as the state finance agency. A
net total of some EUR 11bn is to be raised in 2015. ICGP focuses on the issue of two
classes of securities. In the short-term maturity segment, Bilhetes do Tesouro (BT) are
issued and in mid-August these accounted for a volume of around EUR 12.2bn. In longterm maturities, the agency offers Obrigações do Tesouro (OT) and their total volume
stands at EUR 103.9bn. Alongside these standard instruments, EUR-EMTN (EUR
1.6bn) complete the product range. A total volume of EUR 126.2bn is presently in issue.
Up-to-date information is provided by the IGCP in its Investor Presentation July 2015
and Funding Outlook 2015.
EUR Bonds Portugal (EURbn) – Maturity profile
Ratings Overview
20
LT
Outlook
Fitch
BB+
Positive
Moody’s
Ba1
Stable
S&P
BBu
Positive
18
Last updated: 20 August 2015
Amount Outstanding (EURbn)
16
14
12
10
8
6
4
2
0
PORTUG
PORTB
PGB
2015
0.1
4.0
5.4
2016
2017
2018
0.1
2019
0.1
2020
2021
0.1
8.8
6.8
8.9
8.7
10.9
10.6
9.5
Source: Bloomberg, NORD/LB Fixed Income Research
2022
1.3
2023
2024
2025
>2025
8.0
12.1
8.5
14.4
Maturity
max. 50Y
Security
OT; PGB
Obrigações do Tesouro (OT)
Maturity
3, 6, 9, 12m
18m
Day count
act/360
act/360
Cpn frequency
annual
Issuance
occasionally
Coupon type
zero
zero
Cpn frequency
discounted
discounted
Issuance
rd
monthly, 3 Wed.
quarterly
Bilhetes do Tesouro (BT) are money market paper with a maximum maturity of 18
months. They are generally issued via auction on the first and/or third Wednesday of the
month, with issues announced in detail in the BT issuance calendar. Since their introduction in 1985, BTs were the most important source of funding for the Portuguese
finance agency IGCP up until 1998. There was then a temporary phase from 1999 to
2003 when no BTs were issued because attention turned to medium and long-term
government bonds (OT) with the introduction of the euro. BTs were included in the programme again in order to complete the short-term maturity spectrum.
Security
PORTUG
PORTUG
PORTUG
PORTUG
Portugal Govt International
Bond (PORTUG)
Coupon type
fix
Essentially, Obrigações do Tesouro (OT) are Portugal's main funding instruments with
maturities of between 1 and 50 years. Apart from bonds with maturities of over 100
years which were issued in the 1940s, the OT with the longest residual maturitity is PGB
4.1 02/15/45, which was only issued at the beginning of 2015. As Portugal was under
the Financial Assistance Programme until 17 May 2014, there were no longer any regular auctions. The tap issue of PGB 5.65 02/15/24 (EUR 6.75bn) on 23 April 2014 was an
important step in the country's return to the primary market. In principle, OT can be
placed in the primary market by syndication, auction or as tap issues. The OT issuance
calendar is published at the beginning of each year or quarter. The auctions are generally carried out on the second Wednesday of the each month. Stripping of OTs is also
possible in principle.
Security
BT; PORTB
BT; PORTB
Bilhetes do Tesouro (BT)
Maturity
5, 7, 10Y (EUR)
8Y (EUR)
5 ¼Y (EUR)
various (FX)
Day count
act/act
Day count
act/360
act/360
act/360 NonEOM
various
Coupon type
FRN (EUR003M)
FRN (EUR006M)
variable
various
Cpn frequency
discounted
discounted
semi-annual
various
Issuance
occasionally
occasionally
29/10/2012
occasionally
Portugal's EUR 1.6bn EMTN programme includes five FRNs with a volume of EUR 50m
each. PORTUG 4.6 10/17/22 (EUR 1.3bn) was issued on 14 February 2014. Foreign
currency bonds are denominated in USD and GDP. The bond denominated in Japanese
yen was redeemed.
6
6
5
5
4
4
3
3
2
2
1
1
0
06.2014
08.2014
2 Yr
10.2014
4 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
12.2014
5 Yr
02.2015
7 Yr
04.2015
06.2015
10 Yr
30 Yr
0
08.2015
Yield (%)
Yield (%)
Portuguese Govt Bonds –Yields (%)
Slight rise in Portugal's
general government debt
Portugal's general government debt stood at 130.2% of GDP in 2014, which represents
a slight rise on the previous year (2013: 129.7% of GDP). Conversely, the budget deficit
continued to ease. It amounted to -4.5% of GDP in 2014, an improvement of 0.3 percentage points on 2013. According to Statista, the deficit is set to drop below the 3%
limit as early as next year.
Revenue increased again
Portugal achieved a further increase in 2014 with revenue of EUR 77.0bn. (2013: EUR
76.6bn). Taxes on income and wealth which reached their highest level in the period
under review, slipped slightly by around 2.4% to EUR 18.9bn. However, there was a rise
in revenue from social contributions (2014: EUR 20.5bn), and from taxes on production
and imports (2014: EUR 24.6bn). Other revenue fell for the second time in succession to
approximately EUR 13.0bn in 2014.
Gross Debt vs. Budget Balance (% of GDP)
Total Revenue vs. Total Expenditure (EURbn)
130
0
120
100
90
110
-2
80
100
70
90
-4
60
80
70
50
-6
60
40
50
-8
40
30
20
30
-10
20
10
10
0
0
-12
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
2013
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2014
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
Rise in payable interest
despite historically low key
rates
At EUR 84.7bn (2013: EUR 84.8bn), expenditure is virtually on a par with the previous
year and once again clearly exceeds revenue. Social benefits and social transfers
amounted to some EUR 34.1bn, which equates to around 40% of all expenditure. Compensation of employees, which serves as the gauge for savings in public sector services, fell to EUR 20.5bn (2013: EUR 21.1bn). However, this amounted to more than
EUR 24bn in the years 2009/10. Payable interest, which consistently stood at around
EUR 3.9bn in the period 2001 to 2004, reached a new record of EUR 8.6bn in 2014.
Other expenditure totalled EUR 19.5bn (2013: EUR 19.4bn), remaining significantly
below the highest figure in this time series (2010: EUR 26.6bn). Capital transfers have
always played a secondary role and absorbed just EUR 2.0bn.
New Portuguese government
elections at start of October
Portugal's parliamentary elections are scheduled to take place on 4 October this year.
The polls show that the result could be close for the current liberal-conservative governing coalition led by the Social Democrat Minister President Pedro Passos Coelho. The
Portuguese, who have been hit by severe cuts and tax rises as the price for restructuring
public finances, are in the mood for a change. The socialist opposition party, headed by
the frontrunner António Costa, has made strong gains in the polls and could replace the
CDS coalition partner as the second biggest force in the country. Political instability,
fragmentation and a lack of governing capacity would hamper further reforms made by
Portugal and jeopardise further consolidation of the state and the economy.
Comment – Public finances
Portugal's determination to bring its finances into order deserves recognition. The Constitutional Court considered that the austerity measures went too far in some points, with
the result that the government continually had to find new ways forward in order to
achieve savings in the public sector for example. Since May 2014, Portugal, which is the
poorest country in Western Europe, has been back on its own two feet again in financial
terms. After tough years of austerity, Portugal's economy recorded growth of 0.9% in
2014. The unemployment rate has also fallen continually since 2013 (17.5%), standing at
less than 12% in 2015. Should efforts to develop the country's natural resources intensify, this would make Portugal less dependent on mineral oil and natural gas imports on
the one hand, and develop another revenue stream for restructuring public finances on
the other. Taking climate change and raw material shortages into consideration, Portugal
is in the vanguard in Europe in the field of renewable energies. The law on own use of
any electricity generated represents further progress in the decentralisation of electricity
production and additional funding from private investors is expected. Brussels happily
holds Portugal up as a "star pupil", but its "success story" of recent years also has its
negative side, and many people in Portugal have yet to feel the effects of the improved
macroeconomic situation in their everyday lives. Although Portugal is now faring better,
the austerity policy has barely eased. With regard to the parliamentary election in October, plans for further reform and the associated consolidation could be endangered if
there is no majority capable of forming a government. With indebtedness of around
130% of GDP, Portugal is more vulnerable than almost any other country in Europe if
economic growth fails to materialise.
Strengths & opportunities
Weaknesses & risks
+
low wage costs
–
logistics disadvantages due to peripheral position
+
good transport infrastructure
–
high debt and payable interest
+
progress in reduction of debts
–
emigration of skilled workers (brain drain)
+
positive effects of reforms
–
constitutional court limits austerity measures
+
efficiency enhancement in public sector
–
risk of political instability
–
dependence on foreign investors
Source: NORD/LB Fixed Income Research
Comment – Bond market
Portuguese government bonds sit in the BB segment and are thus categorised as speculative investments. As a result of the relatively high ratio of foreign investors, who generally switch government bonds around more frequently than domestic investors, yields on
Portuguese OTs are always exposed to high fluctuations. We assume that Portugal will
continue to be regularly represented in the capital market.
Slovakia
Economy improving but new on the increase
Slovakia (Slovensko; SK0) is
divided into four NUTS 2
regions:
Slovakia (GDP 2014: EUR 72.1bn) emerged from the division of the former Czechoslovakia in 1993. It joined the EU in 2004 and the euro was introduced at the beginning of
2009. The capital Bratislava is located only 55 km from Vienna. With a budget deficit of 2.9% of GDP and sovereign debt of 53.6% of GDP (both 2014), Slovakia’s economic
data are quite impressive compared with other European countries. In the last ten years,
government expenditure vastly exceeded income; a negative trend in total debt despite
stable economic growth (3.1% Q1/15) cannot be overlooked. Slovakia is an important
distribution hub for Russian natural gas, which is supplied by pipeline (Transgas) to
Veľké Kapušany [SK04] and passed on to the Czech Republic, Austria and Germany.
Slovakia is also the largest user of nuclear power in the Eurozone after France. Bratislava [SK01; share of national GDP: 28%] is the most densely populated region in the
country and the preferred location for foreign direct investment. Industry is broadly based
although the automotive and electrical industries predominate with about 40% of exports. With a share of roughly one third of total economic output, Western Slovakia
[SK02] ranks first, ahead of the Bratislava region. Industry (automotive, tyre manufacturing, electronics) is concentrated in the west around Nitra, Trnava and Trenčín. In Central
Slovakia [SK03; GDP share: 19.9%] production facilities are located in the Banská Bystrica region (Lučenec, Rimavská Sobota, Poltár) as well as in Žilina. Košice and Prešov
are the most important industrial centres in the east [SK04; GDP share: 19.7%].
[SK01] Bratislavský kraj
[SK02] Západné Slovensko
[SK03] Stredné Slovensko
[SK04] Východné Slovensko
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Industry (except construction)
2 Trade, transport, accomodation, food serv.
3 Public admin, educ., human health, social
4 Professional, scientific, technical activities
5 Construction
6 Real estate activities
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
5.4
49,035
75.2
Value
26.7
22.8
13.5
7.7
7.6
21.8
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Road vehicles (including air-cushion vehicles)
10.8%
24.5%
1 Germany
22.0%
Telecommunications and sound-recording and reproducing
2.5%
apparatus14.9%
and equipment
2 Czech Republic
12.9%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 5.7%
parts thereof3(including
Poland non-electrical counterparts, n.e.s.,
8.3%
of electrical household-type
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
5.2%
n.e.s.
4 Hungary
6.3%
Iron and steel
2.9%
5.1%
5 Austria
6.1%
Petroleum, petroleum products and related materials 5.5%
3.7%
6 United Kingdom
5.2%
Food, beverages and tobacco
9.0%
3.6%
7 France
4.9%
Manufactures of metals, n.e.s.
3.1%
3.5%
8 Italy
4.5%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
2.7%
8
9 Russia
3.3%
Rubber manufactures, n.e.s.
0.9%
2.6%
10 Netherlands
2.5%
Value
1.55
4.284
0.147
0.161
-0.024
0.057
1.347
0.764
7.182
-6.204
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Road vehicles (including air-cushion vehicles)
8.0%
12.7%
1 Germany
18.7%
Telecommunications and sound-recording and reproducing
3.4%
apparatus10.7%
and equipment
2 Czech Republic
16.6%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 7.4%
parts thereof3(including
Austria non-electrical counterparts, n.e.s.,
9.2%
of electrical household-type
Petroleum, petroleum products and related materials 12.0%
6.7%
4 Russia
7.7%
Food, beverages and tobacco
8.6%
5.5%
5 Hungary
6.1%
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
4.7%
n.e.s.
6 Poland
6.1%
Manufactures of metals, n.e.s.
2.8%
4.1%
7 South Korea
5.6%
Iron and steel
2.6%
3.5%
8 China
4.0%
Professional, scientific and controlling instruments and apparatus,
1.9%
n.e.s.
3.4%
9 France
3.5%
Crude materials
4.3%
3.1%
10 Italy
3.4%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
EUR bonds Slovakia (EURbn) – Maturity profile
Ratings Overview
9
LT
Outlook
Fitch
A+
Stable
Moody’s
A2
Stable
S&P
A+
Stable
8
Last updated: 20 August 2015
Amount Outstanding (EURbn)
7
6
5
4
3
2
1
0
SLOVTB - ZERO COUPON
SLOVAK - FIXED
SLOVGB - FLOATING
SLOVGB - FIXED
2015
0.4
2016
2017
2018
2019
2020
1.0
1.5
3.0
4.2
2021
2023
2024
2025
3.0
2.3
3.0
1.0
1.9
1.3
Source: Ardal, Bloomberg, NORD/LB Fixed Income Research
3.0
>2025
0.5
7.1
In 2002, Slovakia reformed its financial management and established the funding agency Ardal two years later. Slovakia issues traditional money market and capital market
securities. Treasury bills are called Štátne pokladničné poukážky (ŠPP), while government bonds are identified as Štátny dlhopis (ŠD) in the original. ŠD are currently available in three different coupons (fixed, floating, zero). Both auctions and syndications are
used when placing bonds – with the securities to be placed being split equally in each
case. Ardal provides a forecast in the current Investors’ Presentation (January). The
investor base is to be expanded further in 2015/16. Foreign currency bonds are available
in CHF, USD, JPY and Czech koruna.
Finance Agency Ardal in
place since 2004
Maturity
1 to 12m
Security
ŠPP; SLOVTB
MOF Slovakia Treasury Bill
(SLOVTB)
Maturity
5 to 20Y
6, 10Y
3, 5, 6Y
3Y
Maturity
10Y, 15Y (EUR)
10Y, 15Y (FX)
Coupon type
zero
Cpn frequency
discounted
Issuance
occasionally
MOF Slovakia Treasury Bills are zero coupon bonds, which are placed with a maximum
maturity of twelve months. According to Slovakia’s Ardal (Debt and Liquidity Management Agency), these securities are only held by residents (banks and legal entities).
Security
ŠD; SLOVGB
ŠD; SLOVAK
ŠD; SLOVGB
ŠD; SLOVGB
Slovakia Government Bonds
(SLOVGB; SLOVAK)
Day count
act/360
Day count
act/act
act/act
act/360
act/act
Coupon type
fix
fix
FRN (EUR006M)
zero
Cpn frequency
annual
annual
semi-annual
discounted
Issuance
occasionally
occasionally
occasionally
4/6/2011
There are 16 Slovakia Govt. Bonds denominated in euro placed in the market at present
(EUR 30.3bn), of which, 15 carry fixed coupons (EUR 28.8bn). The last bond placed
was SLOVGB 1 3/8 01/21/27 (EUR 1.65bn), which was placed on 21.01.2015. A fifteenyear bond (SLOVGB 3 5/8 01/16/29; EUR 1.97bn) had also been placed in January in
the previous year. The only zero bond expired in 2014 and EUR 1.5bn was outstanding.
At present, only EUR 1.5bn is outstanding from a FRN, where the reference index is 6MEuribor. In our opinion, SLOVAK 4 3/8 05/15/17 (EUR 1bn) is also a normal government
bond so we list it here and not in the following section.
Security
ŠD; SLOVAK
ŠD; SLOVAK
Day count
act/act
act/act
Coupon type
fix
fix
Cpn frequency
annual
annual
Issuance
occasionally
occasionally
At present, there are two euro-denominated Slovakian bonds, which were placed under
the Slovakia International Government Bond label. They are SLOVAK 4 03/26/21 and
SLOVAK 3.6 02/21/34, which are worth EUR 1bn and EUR 0.5bn respectively. The
Slovaks have recently issued two bonds in Norwegian kroner, having previously placed
yen bonds and issues denominated in Swiss francs.
Slovakia International
Government Bond
(SLOVAK)
3
3
2
2
1
1
0
0
-1
06-2014
08-2014
10-2014
2 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
12-2014
4 Yr
02-2015
5 Yr
04-2015
10 Yr
06-2015
30 Yr
-1
08-2015
Yield (%)
Yield (%)
Slovakian Govt Bonds –Yields (%)
Gross debt vs. budget balance (%)
Total revenue vs. total expenditure (EURbn)
35
180
0
160
-2
30
140
-4
25
120
-6
20
-8
15
-10
10
100
80
60
-12
40
20
-14
0
-16
5
0
2005
2005
2006
2007
2008
2009
2010
2011
2012
2013
2006
2007
2008
2009
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
2014
Government consolidated gross debt (% of GDP, lhs)
2010
2011
2012
2013
2014
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
Comment – Public finances
Source: Eurostat, NORD/LB Fixed Income Research
Slovakia's good results in terms of the Maastricht criteria as well as the competitiveness
of its automotive industry are the country's biggest plus point. The austerity measures of
the last few years have only slowed the increase in expenditure, and important and necessary investment was not carried out. In our opinion, it would have been helpful to promote the issues of training and the labour market in order to raise the country's competitiveness in the international arena. Overall, joining the EU and the Eurozone has helped
expand foreign trade and achieved greater diversification in terms of trading partners.
Slovakia's geographic position in principle favours a focus on the European market,
while exports to Asia or America are of little relevance. We believe the inclusion of its
neighbours, the Czech Republic and Poland, in the Eurozone in particular would generate strong positive effects. A very high 26.7% of Slovakia's value added is delivered by
industry (excluding construction). The country's energy needs are correspondingly high
and are primarily covered by nuclear energy, which at least optically reduces the share
of imports attributable to fossil fuels. Going forward, in our opinion it would be sensible to
step up the expansion of the services sector in order to reduce the dependency on energy imports.
Strengths & opportunities
Weaknesses & risks
+
Strong, stable economic growth
–
Dependence on exports
+
Hub for Eastern European business
–
Lack of investment in R&D
+
Industrial tradition
–
Weak domestic market; poor purchasing power
+
Good debt situation
–
Focus on automotive and electronics industry
+
Low wages but a highly educated workforce
–
Regional differences in economic growth
+
EU funds for environmental technology projects
in particular
Source: NORD/LB Fixed Income Research
Comment – Bond market
Slovakian government bonds are a not very liquid investment in the A segment. Because
of the small number of government bonds and the limited liquidity on the secondary
market, Slovakian bonds are primarily of interest for buy-and-hold investors who want to
assume a broad international position for reasons of risk diversification.
Luxembourg
Financial sector dominates
Luxembourg is not divided
into different NUTS regions
With a GDP of EUR 45.5bn, Luxembourg provided 0.5% of the eurozone’s economic
output in 2014. The Grand Duchy was a founder member of the present EU in 1952
(European Coal and Steel Community) and has established a role primarily as an internationally significant financial centre. Together with the European institutions (including
the European Parliament, ECJ, EFSF) as employers, this circumstance leads to one of
the highest GDP per capita in the world (EUR 83,100 in 2013, current prices). Compliance with the Maastricht criteria (budget surplus of 0.6% in 2014; total debt is 23.6% of
GDP), is one factor which serves to highlight the country’s economic strength. In 2014,
the financial sector alone contributed 25.4% to gross value added, more than twice as
much as Switzerland (10.2%) or three times more than the UK (ca. 8 %). Because the
domestic market is very small, more than 80% of all goods and (financial) services are
exported. Luxembourg’s most important trading partners are Germany, France and
Belgium, with country benefitting not only from its geographical location but also from a
modern transport infrastructure. The Grand Duchy has a well-developed national road
network, a rail network and an international airport (Findel), which ranks as one of the
more important airports in Europe in terms of freight volume. Luxembourg is connected
to both the German and the French rail networks. Mertert, the inland port located on the
Mosel, is also of considerable significance to the Grand Duchy because of the connection to the waterway systems of its two large neighbours.
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Financial and insurance activities
2 Trade, transport, accomodation, food serv.
3 Public admin, educ., human health, social
4 Professional, scientific, technical activities
5 Real estate activities
6 Construction
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
0.5
2,586
49.4
Value
25.4
17.6
15.8
10.9
9.6
20.7
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Telecommunications and sound-recording and reproducing
2.5%
apparatus15.0%
and equipment
1 Germany
Iron and steel
2.9%
14.5%
2 France
Food, beverages and tobacco
9.0%
8.2%
3 Belgium
Professional, scientific and controlling instruments and apparatus,
2.3%
n.e.s.
5.5%
4 Italy
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
5.2%
8
5 Switzerland
Road vehicles (including air-cushion vehicles)
10.8%
5.1%
6 Netherlands
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
4.4%
n.e.s.
7 United Kingdom
Non ferrous metals
1.8%
3.5%
8 Spain
Rubber manufactures, n.e.s.
0.9%
3.3%
9 USA
Textile yarn, fabrics, made-up articles, n.e.s., and related1.3%
products 3.0%
10 Poland
Weight
23.4%
17.4%
16.5%
5.6%
4.4%
3.9%
3.2%
2.9%
2.6%
1.8%
Value
2.36
-6.337
23.881
0.753
1.123
22.005
-2.233
2.811
74.567
-86.338
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Food, beverages and tobacco
8.6%
10.5%
1 Belgium
30.7%
Road vehicles (including air-cushion vehicles)
8.0%
9.8%
2 Germany
23.4%
Petroleum, petroleum products and related materials 12.0%
8.6%
3 France
12.2%
Other transport equipment; confidential traffic of section 3.0%
7
7.2%
4 USA
7.0%
Crude materials
4.3%
6.7%
5 China
6.1%
Telecommunications and sound-recording and reproducing
3.4%
apparatus6.6%
and equipment
6 Netherlands
5.0%
Professional, scientific and controlling instruments and apparatus,
1.9%
n.e.s.
4.3%
7 Mexico
3.6%
Iron and steel
2.6%
3.7%
8 Italy
2.1%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
3.5%
8
9 United Kingdom
1.5%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 3.2%
parts thereof
10(including
Japan non-electrical counterparts, n.e.s.,
1.0%
of electrical household-type
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
EUR bonds Luxembourg (EURbn) – Maturity profile
Ratings Overview
Outlook
Fitch
AAA
Stable
Moody’s
Aaa
Stable
S&P
AAA
Stable
Last updated: 20 August 2015
3
Amount Outstanding (EURbn)
LT
2
1
0
LGB
2020
2.0
2022
1.0
Source: Bloomberg, NORD/LB Fixed Income Research
2023
2.0
>2025
1.1
Trésorie de l’Etat is
responsible for debt
management
Maturity
5, 10, 15Y
Given its strong public finances, Luxembourg did not make any use of the primary market for a long time, only using bank loans for funding purposes. However, on 28 September 2008, the Grand Duchy initially needed EUR 2.5bn for a joint rescue package by
the Benelux countries for Fortis and this was rapidly followed by an additional EUR
376m for Dexia. To finance its participation in rescuing the two banks, Luxembourg issued bonds totalling EUR 5bn in 2008, 2010 and 2012, which were followed in March
2013 by an initial EUR 750m and a further EUR 300m in August. The first bond following
the self-imposed hiatus was a five-year government bond in 2008. Before that, the last
issue of a Luxembourg bond was in 1997, which was repaid ten years later. There are
no marketable money market securities. The Luxembourg Treasury (Trésorie de l’Etat)
acts as debt manager and its website contains the now outdated Presentation to Investors (June 2013). According to Eurostat, over 90% of Luxembourg citizens hold Luxembourg debt securities, which is the highest figure among all 19 eurozone countries.
Security
LGB
Luxembourg Govt Bond
(LGB)
Day count
act/act
Coupon type
fix
Cpn frequency
annual
Issuance
occasionally
Luxembourg currently has five bonds outstanding, of which only three bonds serve the
ten-year segment. This trio totals EUR 5bn. A fifteen-year bond (LGB 2 1/4 03/19/28)
has an outstanding volume of EUR 750m and the long-dated bond (LGB 2 3/4 08/20/43)
currently stands at EUR 300m. The five-year segment is currently unoccupied. With
outstandings of only EUR 6bn, the market has to be described as very narrow.
3
3
2
2
1
1
0
0
-1
06.2014
08.2014
10.2014
LGB 03/21/2022
12.2014
02.2015
LGB 03/19/2028
04.2015
06.2015
Yield (%)
Yield (%)
Luxembourg Govt Bonds –Yields (%)
-1
08.2015
LGB 08/20/2043
Source: Bloomberg, NORD/LB Fixed Income Research
Budget surplus of +0.6% of
GDP
Luxembourg is one of the few members of the eurozone to comply with both Maastricht
criteria. The country posted another budget surplus in relation to GDP of +0.6% in 2014
(2013: 0.9%). The Grand Duchy is also a star performer with regard to sovereign debt,
which amounts to a low 22.3% of GDP (2012: 24.0%). In the Eurozone, it is only outdone
by Estonia (10.5% of GDP) in this category.
Gross debt vs. budget balance (% of GDP)
Total revenue vs. total expenditure (EURbn)
100
5
90
25
4
20
80
3
70
2
60
50
15
1
10
40
0
30
5
-1
20
-2
10
0
0
2005
-3
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2006
2007
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
Comment – Public finances
2008
2009
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
2010
2011
2012
2013
2014
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
Luxembourg relies on the financial sector more than any other country in the single
currency zone. In terms of gross value added, it clearly outperforms even the UK and
Switzerland. In this respect, it can only be a very difficult task to increase the significance
of other sectors. Luxembourg is very well placed not just with regard to the Maastricht
criteria. Government finances are sound, which puts the government in the comfortable
position of being able to initiate the necessary measures in the pension and healthcare
systems without any pressure. While expenditure will increase because of demographic
factors, the increase in income resulting from indirect taxes is likely to be an adequate
means over the next few years. In our opinion, the Grand Duchy is foregoing too many
inflows here. For instance, a more broadly based application of the standard value added rate would not disadvantage Luxembourg, even in a European context.
Strengths & opportunities
Weaknesses & risks
+
Substantial purchasing power and high standard
of living
–
Dependence on the financial sector
+
European institutions
–
Small domestic market
+
Favourable geographical situation
–
Non-compliance with the Maastricht criteria
+
Attractive tax law
–
Lack of investment in R&D
+
Very good debt situation
–
Small domestic market
Source: NORD/LB Fixed Income Research
Comment – Bond market
Luxembourg government bonds are a sound, not very liquid investment in the AAA segment. Because of the small number of securities and the limited liquidity in the secondary
market, the Grand Duchy’s sovereign bonds are primarily of interest for buy-and-hold
investors, who want to be broadly positioned internationally in the AAA segment for reasons of risk diversification.
Slovenia
Turnaround achieved
Slovenia is divided into
twelve NUTS 3-regions:
The modern Republic of Slovenia emerged in 1991 as a result of the declaration of independence by the former Yugoslavian Socialist Republic of Slovenia. Slovenia joined
both the EU and NATO in 2004 and was the only country in the former Yugoslavia to
introduce the euro in 2007. Today, EU accession is viewed as the trigger for a bubble in
the property sector, which together with the financial crisis of 2009 led to an economic
crisis. To ease the pressure on the stricken banking sector, the Bank Asset Management Company (BAMC) was founded as a bad bank in 2013. The resultant burden on
the Slovenian national budget led to breaches of the Maastricht criteria (sovereign debt
reached 80.9% of GDP; 4.9% new debt in 2014). Nonetheless, it can be stated for Slovenia that the country has turned its fortunes around – the speed at which debt was
being accumulated has slowed significantly, sovereign debt has remained within tolerable limits and export-oriented growth is back above average (2.6% of GDP in 2014). The
country’s main trading partners are Germany and Italy. The Adriatic port of Koper, which
is only a few kilometres from Trieste (Italy), will be deepened by 2018 and a container
terminal will be added. The two largest cities are the capital Ljubljana (west) and Maribor
(east). Foreign trade is dominated by engineering and vehicle manufacturing. Other
mainstays of the economy include metal processing, the chemicals and pharmaceuticals
industry as well as tourism (Alps, Adriatic coast). The majority of Slovenia’s economic
output is generated in the west (share of GDP: 55.8%), while the east contributes 44.2%
in total.
[SI001] Pomurska
[SI002] Podravska
[SI003] Koroška
[SI004] Savinjska
[SI005] Zasavska
[SI006] Spodnjeposavska
[SI009] Gorenjska
[SI00A] Notranjsko-kraška
[SI00B] Goriška
[SI00C] Obalno-kraška
[SI00D] Jugovzhodna Slovenija
[SI00E] Osrednjeslovenska
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Industry (except construction)
2 Trade, transport, accomodation, food serv.
3 Public admin, educ., human health, social
4 Professional, scientific, technical activities
5 Real estate activities
6 Construction
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
2.1
20,273
37.2
Value
25.7
20.6
17.4
9.0
7.5
19.9
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Road vehicles (including air-cushion vehicles)
10.8%
14.6%
1 Germany
19.0%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 9.1%
parts thereof2(including
Italy
non-electrical counterparts, n.e.s.,
11.1%
of electrical household-type
Medicinal and pharmaceutical products
6.1%
8.8%
3 Austria
8.6%
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
5.3%
n.e.s.
4 Croatia
6.6%
Food, beverages and tobacco
9.0%
4.8%
5 Hungary
4.4%
Crude materials
3.0%
4.5%
6 France
4.4%
Manufactures of metals, n.e.s.
3.1%
4.3%
7 Russia
4.2%
Iron and steel
2.9%
3.9%
8 Slovakia
4.1%
Petroleum, petroleum products and related materials 5.5%
3.3%
9 Poland
3.6%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
3.2%
8
10 Serbia
3.2%
Value
2.102
0.646
1.961
1.345
0.659
-0.044
-2.932
-0.599
3.981
-6.276
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Road vehicles (including air-cushion vehicles)
8.0%
13.3%
1 Germany
16.5%
Petroleum, petroleum products and related materials 12.0%
9.3%
2 Italy
14.6%
Food, beverages and tobacco
8.6%
8.3%
3 Austria
10.5%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 6.0%
parts thereof4(including
South Korea
non-electrical counterparts, n.e.s.,
4.7%
of electrical household-type
Crude materials
4.3%
5.7%
5 China
4.5%
Iron and steel
2.6%
4.5%
6 Croatia
4.4%
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
4.1%
n.e.s.
7 Hungary
4.1%
Medicinal and pharmaceutical products
4.9%
3.8%
8 Turkey
3.6%
Non ferrous metals
2.1%
3.3%
9 France
3.3%
Manufactures of metals, n.e.s.
2.8%
3.1%
10 Netherlands
3.2%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
EUR bonds Slovenia (EURbn) – Maturity profile
Ratings Overview
6
Outlook
Fitch
BBB+
Stable
Moody’s
Baa3
Stable
A-
Positive
S&P
Last updated: 20 August 2015
5
Amount Outstanding (EURbn)
LT
4
3
2
1
0
SLVNTB
SLOVEN
SLOREP
2015
0.2
2016
0.8
3.0
1.0
2017
2018
2019
2020
2021
2022
2024
2025
>2025
2.3
1.0
0.1
1.2
1.6
2.6
1.1
1.5
1.3
2.8
Source: Bloomberg, NORD/LB Fixed Income Research
The Ministry of Finance
determines the issue of
money and capital market
securities
Maturity
3m
6m
12m
18m
Security
TZ; SLVNTB
SZ; SLVNTB
DZ; SLVNTB
OZ; SLVNTB
Slovenia Ministry of
Finance (MOF) T-Bill
Auction calender SLVNTB
Maturity
5, 10, 15, >15Y
Day count
act/360
act/360
act/360
act/360
Auction calender SLOREP
Day count
act/act
Cpn frequency
discounted
discounted
discounted
discounted
Issuance
as announced
as announced
as announced
as announced
Coupon type
fix
Cpn frequency
annual
Issuance
occasionally
A distinction is made between three categories in the medium to long-term maturity
segment. At present, there are no outstanding securities with a five-year maturity. The
auction calendar for 2015 is also empty. Nonetheless, a total of three bonds were issued
over 10, 20 and 30 years in March and July this year. The maturities are very uniformly
spread and there will be a funding requirement of some EUR 4bn in 2016. In the ultralong maturity range (>15 y.) there are two new bonds (maturities 2035 and 2045; EUR
1.3bn in total). Since 2008, a minimum volume of EUR 1bn has been required for new
issues.
Security
RS; SLOVEN
RS; SLOVEN
Slovenian International Govt
Bond (SLOVEN)
Coupon type
zero
zero
zero
zero
There are four different maturities in the short-term maturity segment. There are currently no outstanding volumes in the three-month bonds (TZ15 series). In the six-month
maturities (SZ79 to SZ82), four bonds represent an amount of EUR 31m. An additional
EUR 458.2m (DZ57 to DZ64) is attributable to securities with twelve-month maturities.
The OZ series consists of two T-Bills, whose EUR 588.5m represents ca. 55% of the
total volume of money market paper.
Security
RS; SLOREP
Slovenia Govt Bond
(SLOREP)
Maturity
10Y (EUR)
10Y (USD)
Slovenia has no specialised financial agency, so that classic money market (Zakladne
menice) and long-term capital market papers (Obveznice) are issued directly by the
Ministry of Finance (MOF). The Ministry’s website gives a complete overview of all outstanding securities. Only money market securities are regularly launched on the primary
market by auction. Bonds with a longer term maturity, which account for more than three
quarters of the total volume, represent the most important sources of funding and as a
rule, take the form of syndicated bond issues. These securities are primarily traded on
MTS Slovenia or the Slovenian Stock Exchange. Slovenia’s funding requirement for
2014 is also indicated on the website, where it is quoted at a maximum of EUR 6.5 bn.
Day count
act/act
ISMA-30/360
Coupon type
fix
fix
Cpn frequency
annual
semi-annual
Issuance
occasionally
occasionally
Apart from SLOVEN 4 03/22/18 (EUR 1bn), there is only one other Euro-denominated
bond in this category, namely SLOVEN 4.7 11/01/16 (EUR 1.5bn). Approximately EUR
8.4bn is represented by five USD securities.
4
4
3
3
2
2
1
1
0
06.2014
08.2014
2 Yr
10.2014
3 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
12.2014
5 Yr
02.2015
7 Yr
04.2015
10 Yr
06.2015
20 Yr
0
08.2015
Yield (%)
Yield (%)
Slovenian Govt Bonds –Yields (%)
Gross debt vs. budget balance (% of GDP)
Total revenue vs. total expenditure (EURbn)
100
1
90
25
-1
20
80
-3
70
-5
60
50
15
-7
10
40
-9
30
-11
5
20
-13
10
0
0
-15
2005
2006
2007
2008
2009
2010
2011
2012
2013
2005
2014
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
Comment – Public finances
2006
2007
2008
2009
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
2010
2011
2012
2013
2014
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
In Slovenia, the government plays a comparatively active role in economic affairs, which
recently became apparent from the extremely substantial expenditure to recapitalise the
domestic banking sector. We think that privatisations would not only make sense to
achieve short-term income but that the government could also find itself embroiled in
conflicts of interest if it becomes too involved in markets where it sets the conditions. In
virtually all problem areas (employment, pensions, taxes), the European Commission
recently demanded more activity and resolve. With regard to the changes to the tax
system, it is clear that the intention is to tax the more prosperous social strata more
heavily. Above all, Slovenia can focus on tourism and the strong exchange of goods with
its immediate neighbours. Its access to the sea (Koper) gives the country the option of
gradually developing other foreign markets.
Strengths & opportunities
Weaknesses & risks
+
Debt situation within appropriate limits
–
Focus on the automotive industry
+
Good infrastructure
–
Banking sector weakened, not profitable
+
Strong export economy
–
High labour costs compared regionally
+
EU subsidies as investment aid
–
Small domestic market
+
Renewable energies as a growth market
–
Dependence on exports and the global economy
Source: NORD/LB Fixed Income Research
Comment – Bond market
Slovenian government bonds are a not very liquid investment at the interface between Aand BBB ratings. In our opinion, buy-and-hold investors are the primary target group
because of the limited liquidity on the secondary market. The reaction of Slovenian
spreads in connection with the problems in Cyprus showed investors how fragile the
capital markets’ confidence is in relation to the Balkan state. Even today, bonds are afflicted by the debate as to whether Slovenia will become a “second Cyprus”.
Lithuania
Closer links with the West
Lithuania is divided into 10
NUTS 3 regions:
Lithuania was included in the eurozone on 1 January 2015, which consequently became
the EU 19. By joining the eurozone, Lithuania is yet again fulfilling and documenting the
political desire for closer links with the West, with Europe and its institutions (it has been
a member of the EU since 2004 and a member of NATO since 1999). When its economic circumstances are examined more closely (GDP: EUR 34.6bn; 0.36% share of EU19
GDP), its close links with the Russian economy are strikingly apparent (No. 1 in terms of
imports and exports, with a share of over 20% in both cases). This leads to tension
between political and economic decisions in as much as Russia’s policy in the wake of
the Ukraine crisis is viewed very critically by the Baltic states with their Russian minorities, in particular. An increased focus on the West could lead to a downturn in visible
imports/exports with Russia, particularly in the area of commodities (the leading import)
and a deterioration in the Lithuanian economy in the short to medium term. The main
exports are foodstuffs and crude oil and petroleum products (refined for export). The
Lithuanian fibre optic network is exceptionally well developed. Around one-third of all
households are connected to it, which is the highest number in the EU. The economic
centres are Kaunas, Vilnius and Klaipėda. Lithuania is one of six countries complying
with the European stability criteria (debt/GDP ratio of 41.7%, planned new debt is approximately 1.5% of GDP in 2015). Despite the very positive economic data, Lithuania is
faced with a declining number of people in gainful employment. This is primarily attributable to the younger generations migrating, in particular, to other countries in the EU (UK,
Sweden and Germany).
[LT0]: Lietuva
[LT001] Alytaus apskritis
[LT002] Kauno apskritis
[LT003] Klaipėdos apskritis
[LT004] Marijampolės apskritis
[LT006] Šiaulių apskritis
[LT007] Tauragės apskritis
[LT008] Telšių apskritis
[LT009] Utenos apskritis
[LT00A] Vilniaus apskritis
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Trade, transport, accomodation, food serv.
2 Industry (except construction)
3 Public admin, educ., human health, social
4 Construction
5 Professional, scientific, technical activities
6 Real estate activities
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
2.9
65,300
36.3
Value
33.2
24.5
13.5
6.5
5.6
16.6
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Food, beverages and tobacco
9.0%
17.5%
1 Russia
20.9%
Petroleum, petroleum products and related materials 5.5%
17.1%
2 Latvia
9.2%
Furniture and parts thereof; bedding, mattresses, mattress
0.9%
supports, cushions
5.4%
and3similar
Polandstuffed furnishings
8.3%
Crude materials
3.0%
4.9%
4 Germany
7.3%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 4.6%
parts thereof5(including
Belarus non-electrical counterparts, n.e.s.,
4.7%
of electrical household-type
Road vehicles (including air-cushion vehicles)
10.8%
4.3%
6 Netherlands
4.5%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
3.8%
8
7 Estonia
4.3%
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
3.5%
n.e.s.
8 United Kingdom
3.8%
Fertilizers (other than those of group 272)
0.2%
3.4%
9 Ukraine
3.7%
Machinery specialized for particular industries
3.3%
3.0%
10 USA
3.7%
Value
0.51
-1.197
1.584
0.378
1.065
0.141
-1.298
0.324
-1.412
-0.642
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
20.2%
1 Russia
21.7%
Food, beverages and tobacco
8.6%
12.5%
2 Germany
11.0%
Road vehicles (including air-cushion vehicles)
8.0%
5.7%
3 Poland
9.5%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 4.5%
parts thereof4(including
Latvia non-electrical counterparts, n.e.s.,
6.9%
of electrical household-type
Crude materials
4.3%
4.0%
5 Italy
4.9%
Machinery specialized for particular industries
1.7%
3.6%
6 Netherlands
4.8%
Gas natural and manufactured
3.0%
3.4%
7 United Kingdom
4.1%
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
3.4%
n.e.s.
8 Belgium
3.4%
Manufactures of metals, n.e.s.
2.8%
3.0%
9 Sweden
3.2%
Medicinal and pharmaceutical products
4.9%
3.0%
10 Belarus
2.8%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
EUR bonds Lithuania (EURbn) – Maturity profile
Ratings Overview
Outlook
Fitch
A-
Stable
Moody’s
A3
Stable
S&P
A-
Stable
Last updated: 20 August 2015
2
Amount Outstanding (EURm)
LT
1
0
LITHTB
LITHSN
LITHGB
LITHUN
2015
120
41
132
19
2016
2017
128
453
1,000
33
588
2018
2019
2020
2021
2022
2023
2024
>2025
466
1,400
206
257
70
11
132
122
96
500
1,000
Source: Bloomberg, NORD/LB Fixed Income Research
Rating agencies view euro
accession positively
Accession to the euro gave the Baltic country a significant boost. In particular, Standard
& Poor’s and Fitch have rated the country positively since 2014. Moody’s gave the country the ‘thumbs-up’ in May 2015 and now rates it A3, having rated it Baa1 since 2009.
Consequently, the country is rated investment grade by all three leading agencies. The
elimination of any exchange risk is viewed positively here, as is the ongoing improvement in budget finances. The situation in and around Russia poses a risk for the budget,
since Lithuania maintains good relationships but is now suffering from the EU restrictions. The condition of the other 18 eurozone countries, which is not only focused on
recovery, is also problematic for Lithuania. It has meant that the Lithuanian Ministry of
Finance was forced to reduce forecast growth from an ambitious 4.3% to the current
figure of 3.4%.
EMTN programme started in
2014 and expanded
Lithuania started its EMTN programme in January 2014 and gradually expanded it last
year. Government bonds can therefore be traded for international investors. On the one
hand, as usual there is a whole series of primary dealers. However, on the other hand,
there is a small but functioning secondary market for these “Eurobonds”. Other bonds
are denominated in USD and CHF. Here, the Ministry of Finance does not specify either
totals or currencies in advance and makes flexible use of this instrument for funding
purposes according to the website. All circulating bonds are listed on the Luxembourg
stock exchange.
Maturity
2 bis 11 J.
Security
LITHGB
Day count
act/act
Coupon type
fix
Cpn frequency
annual
Issuance
occasionally
Lithuania has not been very active in 2015: only two bonds have been issued since it
acceded to the eurozone (LITHGB 0.7 05/27/20 and LITHGB 0.3 05/20/18). These are a
three-year and a five-year security, in the amounts of EUR 175.6m and EUR 91.0m
respectively. All other 18 bonds were converted to EUR on 1 January 2015. The outstanding total volume of 20 bonds in this segment amounts to EUR 2.5bn.
Lithuania
(LITHGB)
Maturity
Über 10 J.
Security
LITHUN
Day count
act/act
Coupon type
fix/variable
Cpn frequency
annual
Issuance
occasionally
No long-dated bonds have been issued under LITHUN since accession to the eurozone.
Six bonds are denominated in EUR and total EUR 3.9bn. The ten to thirteen-year securities have been running since 2005; two benchmark bonds were added in 2014. Other
currencies are USD (four bonds) and CHF (one).
Lithuania
(LITHUN)
Maturity
variabel
Security
LITHTB
Day count
act/act
Coupon type
zero
Cpn frequency
annual
Issuance
occasionally
With one outstanding bond, it would certainly be presumptuous to speak of a segment
here. LITHTB 0 09/30/15 is also due this year. The only zero has an outstanding volume
of EUR 120m.
Lithuania
(LITHTB)
Lithuanian Govt Bonds –Yields (%)
3
2
2
1
1
Yield (%)
Yield (%)
3
0
06.2014
08.2014
10.2014
LITHGB 09/22/2017
Source: Bloomberg, NORD/LB Fixed Income Research
12.2014
LITHGB 10/31/2018
02.2015
04.2015
LITHGB 10/03/2020
06.2015
LITHGB 02/28/2023
0
08.2015
Gross debt vs. budget balance (% of GDP)
Total revenue vs. total expenditure (EURbn)
100
0
90
-1
80
-2
70
-3
60
-4
50
-5
40
-6
30
-7
20
-8
10
-9
0
-10
14
12
10
8
6
4
2
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2005
2014
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
Comment – Public finances
2006
2007
2008
2009
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
2010
2011
2012
2013
2014
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
While Lithuania was the only one of the eight euro candidates to meet all convergence
criteria in 2014 and is regarded as a model pupil in terms of government finances, the
ECB warned about the risks of inflation. Both the European Commission and the monetary authorities certified that the last Baltic state was fit to join the euro. This was Lithuania’s second attempt at becoming a member of the eurozone. The country originally
wanted to introduce the euro in 2007, but failed to pass muster as inflation was slightly
too high. Olli Rehn, former European Commissioner for Economic and Monetary Affairs,
praised the subsequent course adopted by the country to deal with the crisis. Lithuania
fulfilled the conditions as a result of its longstanding cautious budgetary policy and its
economic reforms. Lithuania has controlled inflation, the budget deficit and government
debt. However, since prices and per capita income in Lithuania were lower than those in
the eurozone, inflation could be expected to trend upwards in future. The ECB also
stressed that confidence in the strength of the financial sector must be increased, which
will be guaranteed most notably through changes designed to make banking supervision
more effective. The budget deficit always remained below 3%, while government debt, at
around 40% of GDP, is comparatively well below the permitted 60%. We are therefore
not alone in thinking that Lithuania must reduce the deficit further and continue its policy
of consolidation. We see risks arising from government-owned companies and low rates
of tax compliance. The pension system could also become a problem in the long term
because of the ageing population.
Strengths & opportunities
Weaknesses & risks
+
Compliance with the Maastricht criteria
–
Relationship with/dependence on Russia
+
Highly developed fibre optic network
–
Declining numbers in gainful employment caused by
migration
+
Regionally differentiated economic structure
–
Structural unemployment
+
EU development aid for infrastructure
–
Small domestic market
+
Moderate corporate taxation
–
Poor health and pension system
+
Political stability
–
Limited supply of technical staff because the entire
population is small
Source: NORD/LB Fixed Income Research
Comment – Bond market
The Lithuanian bond market is small but good. The newest eurozone member has redenominated its outstanding bonds in EUR and various bonds on the secondary market;
however, the volumes traded are low. Sound government finances do not suggest that
more bonds will be issued for funding purposes in future either.
Latvia
Economy on course, in spite of Russia
Latvia is divided into six
NUTS 3 regions, to which 15
groups are allocated:
With GDP of EUR 23.4bn (2014), Latvia, which has been independent since 1991,
accounts for around 0.2% of the eurozone’s economic output. It has been a member of
the EU since 2004. On 1 January 2014, the country became the 18th nation to join the
eurozone. Its trade relations are heavily regionalised. Latvia should most notably benefit
from its Baltic neighbour Lithuania having now joined the eurozone. In the past both
countries have utilised the manufacturing capacities of the electrical engineering/
electronics industries as foreign direct investment and their economies are closely
linked; the common currency means that there is scope for leveraging synergies. Latvia
comfortably meets the Maastricht criteria (new debt 1.4% and overall indebtedness
40.0% as a percentage of GDP in 2014). After the crisis years (2008-2010) Latvia
generated above-average growth (2014 2.4% of GDP) and is almost back to the precrisis level. The capital Riga is the economic centre and contributes around 50% to
Latvia's GDP. The remaining economic output is distributed relatively evenly over the
other regions. A domestic political issue which could potentially escalate into a foreign
policy crisis is the inadequate integration of the Russian minority (approximately 25%),
the majority of whom are classified as “non-citizens”. This minority are, for example, not
entitled to vote and therefore have no participation in the political process. In this context
Russian policy in Ukraine is eyed particularly critically, especially since Latvia is partially
dependent on Russian energy exports.
[LV0]: Latvija
[LV003] Kurzeme
[LV005] Latgale
[LV006] Rīga
[LV007] Pierīga
[LV008] Vidzeme
[LV009] Zemgale
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Trade, transport, accomodation, food serv.
2 Industry (except construction)
3 Public admin, educ., human health, social
4 Real estate activities
5 Professional, scientific, technical activities
6 Construction
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
2.0
64,573
24.1
Value
29.1
18.7
13.4
9.9
7.0
22.0
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Food, beverages and tobacco
9.0%
18.3%
1 Lithuania
Crude materials
3.0%
14.3%
2 Russia
Telecommunications and sound-recording and reproducing
2.5%
apparatus7.7%
and equipment
3 Estonia
Petroleum, petroleum products and related materials 5.5%
5.2%
4 Germany
Cork and wood manufactures (excluding furniture)
0.5%
5.1%
5 Poland
Manufactures of metals, n.e.s.
3.1%
4.0%
6 Sweden
Road vehicles (including air-cushion vehicles)
10.8%
3.9%
7 United Kingdom
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
3.9%
8
8 Denmark
Iron and steel
2.9%
2.9%
9 Norway
Medicinal and pharmaceutical products
6.1%
2.8%
10 Netherlands
Weight
17.6%
14.8%
11.1%
6.5%
6.1%
5.1%
4.6%
3.5%
2.3%
2.1%
Value
-0.19
-2.097
1.662
0.113
1.035
0.514
-0.193
0.35
-0.198
-0.166
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Food, beverages and tobacco
8.6%
14.6%
1 Lithuania
16.9%
Petroleum, petroleum products and related materials 12.0%
9.5%
2 Germany
11.6%
Telecommunications and sound-recording and reproducing
3.4%
apparatus6.4%
and equipment
3 Poland
10.8%
Road vehicles (including air-cushion vehicles)
8.0%
5.7%
4 Russia
7.9%
Crude materials
4.3%
4.8%
5 Estonia
7.7%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
4.6%
8
6 Finland
5.9%
Manufactures of metals, n.e.s.
2.8%
4.1%
7 Italy
4.0%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 3.7%
parts thereof8(including
Netherlands
non-electrical counterparts, n.e.s.,
3.8%
of electrical household-type
Iron and steel
2.6%
3.7%
9 Sweden
3.2%
Gas natural and manufactured
3.0%
3.6%
10 China
2.7%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
EUR bonds Latvia (EURbn) – Maturity profile
Ratings Overview
Outlook
Fitch
A-
Stable
Moody’s
A3
Stable
S&P
A-
Stable
Last updated: 20 August 2015
3
Amount Outstanding (EURm)
LT
2
1
0
LATVTB
LATVGB
LATVIA
2015
90
182
2016
20
258
2017
2018
2019
2020
2021
2022
43
315
400
146
50
87
2,000
65
Source: Bloomberg, NORD/LB Fixed Income Research
2024
1,000
Latvian government bonds
are aimed at foreign
investors
Maturity
6, 12m
Security
LATVTB
Iekšējā aizņēmuma
Parādzīmes (T-Bill)
Maturity
3, 5, 10Y
Day count
act/360
Day count
act/act
Cpn frequency
discounted
Issuance
occasionally
Coupon type
fix
Cpn frequency
annual
Issuance
occasionally
Latvian government bonds issued in the joint European currency are traded under the
label LATVGB. The largest bond of this type is LATVGB 0 1/4 01/23/18, which, with a
volume of EUR 170.9 m, represents only 14.9% of the market. In total EUR 1.1bn are
outstanding in 13 bonds.
Security
LATVIA
Iekšējā aizņēmuma
Obligācjas (Govt Bonds)
Coupon type
zero
In mid-August 2015 there were three discounted treasury notes representing a total
volume of around EUR 110m. While in the past issues with a volume of EUR 15 m were
seen as standard, this is no longer the case. EUR 15 to EUR 75m are in circulation.
Security
LATVGB
Iekšējā aizņēmuma
Obligācjas (Govt Bonds)
Maturity
7, 10Y
The Latvian Treasury issues two standard types of securities. Government bonds with
medium or longer-term maturities are called iekšējā aizņēmuma obligācijas. In the short
maturity segment discounted treasury notes (iekšējā aizņēmuma parādzīmes) are
issued with a term of six or twelve months. Further information on the state of the public
finances can be found on the Finance Ministry or government website. According to the
Eurostat database, around three-quarters of Latvian bonds are held by foreigners.
Day count
act/act
Coupon type
fix
Cpn frequency
annual
Issuance
occasionally
This ticker includes three bonds denominated in EUR and three in USD. There were no
additions to the existing EUR bonds (volume: EUR 2.4bn) in 2015. The three
government bonds denominated in USD remain unchanged and are LATVIA 5 1/4
02/22/17 (USD 1.0bn.), LATVIA 2 3/4 01/12/20 (USD 1.25bn) and LATVIA 5 1/4
06/16/21 (USD 500m).
3
3
2
2
1
1
0
0
-1
06.2014
08.2014
10.2014
LATVIA 5 1/2 03/05/18
Source: Bloomberg, NORD/LB Fixed Income Research
12.2014
02.2015
LATVIA 2 5/8 01/21/21
04.2015
06.2015
LATVIA 2 7/8 04/30/24
-1
08.2015
Yield (%)
Yield (%)
Latvian Govt Bonds – Yields (%)
Gross debt vs. budget balance (%)
Total revenue vs. total expenditure (EURbn)
100
0
90
-1
80
-2
70
-3
60
-4
50
-5
40
-6
30
-7
20
-8
10
-9
0
-10
10
9
8
7
6
5
4
3
2
1
0
2005
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2006
2007
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
Comment – Public finances
2008
2009
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
2010
2011
2012
2013
2014
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
In terms of the national economy, the momentum is likely to continue to clearly outpace
the EU-average. The current endeavours by Russia to establish its logistical independence from its Baltic neighbours represents a potential threat to the importance of Latvian
ports. It is therefore all the more important for Latvia to expand the share attributable to
sectors with a higher degree of value added. In addition to electrical engineering and
electronics, we believe that information and communications technology also offers opportunities. With the aid of EU grants, which are already being used to expand the national fibre optic network for instance, Latvia should continue to make major progress in
terms of technology and increase its competitiveness in the international arena. We view
its traditional inclusion in the Baltic area, through which the country participates in the
economic development of its Scandinavian and eastern European neighbours, as positive.
Strengths & opportunities
Weaknesses & risks
+
Complies with Maastricht criteria
–
Relationship with and dependence on Russia
+
Low labour costs
–
Declining employment figures
+
Logistical importance for CIS
–
Dependence on Russian raw material imports
+
EU subsidies for infrastructure
–
Structural unemployment
+
High level of direct foreign investment
–
Small domestic market
Source: NORD/LB Fixed Income Research
Comment – Bond market
Latvia has proven that it is a trustworthy debtor and does not shy away from even severe
cuts to bring its public finances into order. In this respect, the country's bonds are, in
principle, to be recommended, provided of course that their low level of liquidity does not
pose a problem for an investor. The euro-denominated portfolio was, at one time, rather
modest, but it has gradually been increased over the years – despite the sound public
finances. With a current euro-denominated issuance volume of EUR 3.5bn spread over
16 government bonds, poor liquidity continues to characterise bonds from Baltic nations,
meaning that they are therefore at most suitable for buy-and-hold investors to mix into
their portfolios.
Estonia
Exemplary budget situation and relationship with Russia
Estonia is divided into
five NUTS 3 regions which
encompass 15 districts:
With EUR 18.6bn, Estonia accounts for around 0.2% of EU 19 GDP (2014). It joined the
EU in 2004 and seven years later (2011) became the 17th country to introduce the euro.
A Baltic state, Estonia lies directly opposite the south coast of Finland. The two capitals
are only separated by some 80 km and the languages of the two countries are also
related. Estonia's budget situation is particularly impressive and the country easily complies with the Maastricht criteria (general government debt 10.6% of GDP; budget surplus 0.6% of GDP in 2014). Apart from the years of the financial crisis (2008-2009),
economic growth has been stable at a high level. Foreign trade is dominated by machinery and transport equipment. The capital city, Tallinn, in the Harju region, is the economic centre and contributes around 60% of Estonia's GDP. In terms of industry, transport
equipment and electronics are especially important. The Tartu region, which is part of
South Estonia, represents approximately 10% of national GDP. Growing foreign direct
investment, around half of which comes from Finland and Sweden, has contributed
significantly to Estonia's increased economic output. The ICT industry benefits the most
from the country's proximity to Finland and Sweden, as several production facilities have
been relocated to Estonia. Potential problems lie in the domestic policy difficulties with
its large, and only partly integrated, Russian minority (approximately 25% of the total
population), which could lead to foreign policy dislocations with its Russian neighbour.
Russia's conduct in the Ukraine especially has prompted Estonia's politicians to sit up
and take notice in this regard.
[EE0] Eesti:
[EE001] Põhja-Eesti
[EE004] Lääne-Eesti
[EE006] Kesk-Eesti
[EE007] Kirde-Eesti
[EE008] Lõuna-Eesti
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Trade, transport, accomodation, food serv.
2 Industry (except construction)
3 Public admin, educ., human health, social
4 Real estate activities
5 Professional, scientific, technical activities
6 Construction
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
1.3
45,227
19.5
Value
23.2
21.5
14.7
11.0
8.0
21.7
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Telecommunications and sound-recording and reproducing
2.5%
apparatus12.6%
and equipment
1 Sweden
18.2%
Food, beverages and tobacco
9.0%
9.4%
2 Finland
15.4%
Crude materials
3.0%
8.7%
3 Latvia
10.8%
Petroleum, petroleum products and related materials 5.5%
8.1%
4 Russia
9.9%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 7.7%
parts thereof5(including
Lithuanianon-electrical counterparts, n.e.s.,
5.3%
of electrical household-type
Manufactures of metals, n.e.s.
3.1%
4.6%
6 Germany
4.9%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
4.5%
8
7 Norway
3.9%
Road vehicles (including air-cushion vehicles)
10.8%
4.1%
8 USA
3.8%
Cork and wood manufactures (excluding furniture)
0.5%
3.7%
9 Netherlands
2.7%
Furniture and parts thereof; bedding, mattresses, mattress
0.9%
supports, cushions
3.6%
and
10similar
Denmark
stuffed furnishings
2.7%
Value
-0.20
-0.843
1.183
0.331
0.446
0.406
-0.437
0.412
-0.5
-0.41
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical10.2%
parts thereof1(including
Finland non-electrical counterparts, n.e.s.,
15.1%
of electrical household-type
Petroleum, petroleum products and related materials 12.0%
10.0%
2 Germany
11.6%
Food, beverages and tobacco
8.6%
10.0%
3 Sweden
8.9%
Telecommunications and sound-recording and reproducing
3.4%
apparatus7.5%
and equipment
4 Latvia
8.4%
Road vehicles (including air-cushion vehicles)
8.0%
6.8%
5 Lithuania
7.7%
Manufactures of metals, n.e.s.
2.8%
4.4%
6 Poland
7.6%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
4.0%
8
7 Russia
6.4%
Crude materials
4.3%
3.9%
8 Netherlands
5.5%
Other transport equipment; confidential traffic of section 3.0%
7
3.7%
9 China
4.5%
Machinery specialized for particular industries
1.7%
3.1%
10 United Kingdom
3.2%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
EUR bonds Tallinn (EURbn) – Maturity profiles
Ratings Overview
35
LT
Outlook
Fitch
A+
Stable
Moody’s
A1
Stable
S&P
AA-
Stable
Last updated: 20 August 2015
Amount Outstanding (EURm)
30
25
20
15
10
5
0
TALLIN
2015
6
Source: Bloomberg, NORD/LB Fixed Income Research
>2025
31
Estonia has no need to issue
bonds
Maturity
10, 20Y
Estonia's sovereign debt totals EUR 2.1bn (10.5% of GDP). Since the country does not
issue government bonds, its central government debt is exclusively made up of loan
commitments. Its repayment obligations to the EIB amount to EUR 523.9m (various due
dates up to 2025), some of which relate to loans to finance transport routes in Estonia. A
further EUR 1.6m fell due for repayment to the World Bank on 15 March 2015. Further
information on the country's sovereign debt can be found on the website of the Ministry
of Finance.
Security
TALLIN
Day count
act/360
Coupon type
FRN (EUR006M)
Cpn frequency
semi-annual
Issuance
occasionally
So far, the Baltic nation has not had to raise any financing via the capital market. Consequently, Estonia only participates in the European bond market with bonds issued by
its capital Tallinn, which has launched two euro-denominated floaters. TALLIN 0
12/30/15 matures at the end of 2015 after a ten-year term (volume: EUR 6.4m). In nominal terms, the biggest bond is TALLIN 0 11/29/27, which was launched in 2007 as a 20year bond with a volume of EUR 25.6m, of which only EUR 16.4m remains. Another 20year bond, TALLIN 3.57 12/20/33, was issued at the end of 2013 as a fixed bond. All of
these bonds are highly illiquid.
Capital bonds instead of
government bonds
Gross debt vs. budget balance (%)
Total revenue vs. total expenditure (EURbn)
100
3
1,400
90
1,200
2
80
1,000
70
1
60
800
50
0
600
40
-1
30
20
-2
400
200
10
0
0
-3
2005
2006
2007
2008
2009
2010
2011
2012
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
2013
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
2014
Comment – Public finances
Estonia's public finances are in exemplary order. The call frequently made of the Member States by the EU Commission to shift the tax burden from labour to consumption has
been successfully implemented by Estonia for years. Although the emigration of skilled
workers is undeniable, in our opinion, the positive effects of the country's proximity to
Scandinavia, especially its appeal as a destination for foreign direct investment, predominate. One negative comment is that Estonia's marginal geographic position makes its
regional inclusion in the eurozone very difficult, and this is particularly noticeable in the
country's vital energy supply. Under these conditions, it is likely that reducing its dependence on Russian imports will be a slow process. The Estonian banking sector appears to
be healthy and sufficiently capitalised.
Strengths & opportunities
Weaknesses & risks
+
healthy public finances
–
industrial sectors with low added value
+
moderate taxation
–
adverse demographic development
+
geographic position as transit country for CIS
goods
–
political-economic uncertainties with Russia
+
expansion/diversification of energy supply
–
dominance of capital region
+
well-organised public administration
+
communications infrastructure (most internet
connections per capita worldwide)
Source: NORD/LB Fixed Income Research
Comment – Bond market
Currently Estonian government bonds do not exist because the Baltic nation has always
run its finances so as to comply with the Maastricht criteria. We see Estonia as the counterpoint to Greece, which sank further and further into debt having been granted unjustifiably favourable terms and conditions. We are convinced that investors would welcome
Estonian bond issues.
Cyprus
Caught in the Greek maelstrom?
Cyprus is not divided into
different NUTS regions
At EUR 16.5bn, Cyprus contributes approx. 0.2% to EU 19 GDP (2014). The country ran
into very serious difficulties as a result of the financial crisis, which were exacerbated by
its dependence on the financial sector. As a result, Cyprus had to apply for emergency
loans, which were only granted on the basis that the bondholders of Cypriot banks participated. Consequently, the financial sector shrank considerably, which led to a massive
reduction in economic growth. Meanwhile, the financial sector is only the fourth largest
sector in terms of gross value added. Figures on economic growth show that Cyprus
grew for the first time in Q1/15 after 14 consecutive quarters in which output fell (1.5%
up from GDP Q4/14 to Q1/15). However, attention must be drawn to the degree to which
Cyprus is linked to the Greek economy, even if the links have reduced in the financial
sector, in particular. Consequently, the uncertainty in Greece during the first half of the
year is also likely to have an impact on the Cypriot economy. Apart from these connections, the Cypriot economy is hoping for an upturn in the medium term (starting in approx. 2018) from the exploitation of significant oil and natural gas deposits close to the
coast. A gas terminal set to be one of the world’s largest and requiring investment of
EUR 6-7bn is to be constructed for this purpose. The deposits could satisfy 10% of
Western European demand in addition to Cyprus’s own requirements, and they also
hold the promise of becoming a potentially large source of income.
Country Profile
1 Population (Mln. inhabitants)
2 Area (sq. km)
3 Gross Domestic Product (EURbn)
Gross value added by sectors (%)
1 Trade, transport, accomodation, food serv.
2 Public admin, educ., human health, social
3 Real estate activities
4 Financial and insurance activities
5 Industry (except construction)
6 Professional, scientific, technical activities
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
0.9
9,251
17.5
Value
24.3
22.1
11.6
10.2
8.7
23.0
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Food, beverages and tobacco
9.0%
20.2%
1 Greece
19.7%
Medicinal and pharmaceutical products
6.1%
17.8%
2 United Kingdom
12.2%
Petroleum, petroleum products and related materials 5.5%
17.3%
3 Israel
6.6%
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical 6.4%
parts thereof4(including
USA
non-electrical counterparts, n.e.s.,
4.2%
of electrical household-type
Crude materials
3.0%
5.0%
5 China
3.5%
Telecommunications and sound-recording and reproducing
2.5%
apparatus4.9%
and equipment
6 Germany
3.3%
Gold, non monetary (excluding gold ores and concentrates)
0.4%
3.6%
7 Egypt
2.9%
Non-metallic mineral manufactures, n.e.s.
1.7%
3.6%
8 Italy
2.5%
Organic chemicals
3.0%
3.4%
9 Slovakia
2.4%
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
2.6%
8
10 Lebanon
2.0%
Value
-0.31
-2.942
3.252
1.262
0.384
1.607
0.506
0.169
11.734
-11.374
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
24.3%
1 Greece
23.8%
Food, beverages and tobacco
8.6%
18.8%
2 Israel
9.5%
Road vehicles (including air-cushion vehicles)
8.0%
5.2%
3 United Kingdom
7.4%
Articles of apparel and clothing accessories
3.2%
4.7%
4 Italy
7.2%
Other transport equipment; confidential traffic of section 3.0%
7
4.3%
5 Germany
7.0%
Medicinal and pharmaceutical products
4.9%
4.3%
6 Netherlands
5.7%
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
4.0%
8
7 France
5.6%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical 2.8%
parts thereof8(including
Spain non-electrical counterparts, n.e.s.,
4.8%
of electrical household-type
Essential oils, resinoids and perfume materials; toilet, polishing
1.0% and cleaning
2.7% preparations
9 China
4.4%
Telecommunications and sound-recording and reproducing
3.4%
apparatus2.5%
and equipment
10 Belgium
3.7%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
EUR bonds Cyprus (EURbn) – Maturity profiles
Ratings Overview
Outlook
B-
Positive
Moody’s
B3
Stable
S&P
B+
Positive
Last updated: 20 August 2015
12
Amount Outstanding (EURbn)
Fitch
14
LT
10
8
6
4
2
0
CYPTB
CYPGB
CYPRUS
Loan
2015
0.5
0.0
0.9
2016
0.1
0.7
0.2
2017
2018
2019
2020
2021
2022
2023
0.3
0.0
0.7
0.8
0.2
0.9
0.1
0.1
1.0
0.1
Source: Bloomberg, NORD/LB Fixed Income Research
2.5
>2025
12.4
Maturity
30, 60d; 13w
Security
TB; CYPTB
Security
GRDS; CYPGB
GRDS; CYPGB
Cpn frequency
discounted
Issuance
weekly
Day count
act/365
act/365
Coupon type
zero
fix
Cpn frequency
discounted
annual
Issuance
1/7/2013
occasionally
A total of 29 GRDS represent a volume of EUR 3.3bn, of which 24 securities are worth
less than EUR 100m. Up to 2013, Cyprus mainly issued bonds with four different maturities (2, 5, 10, 15 y.). Since then, the 6, 7, 8 and 9 y maturity ranges have also been
served. Three-year paper has not been floated since 2007. With a volume of EUR
1,022.7m, CYPGB 4.6 10/23/18 is the largest fixed interest bond, followed by CYPGB 4
1/2 07/01/19, worth EUR 692.6m. Consequently, these two bonds account for more than
50% of total outstanding volume.
Govt Registered
Development Stocks
(Cyprus Govt Bonds)
Maturity
2, 5, 10Y
Coupon type
zero
As a rule, Cyprus Treasury Bills run for 13 weeks (but a maximum of 52 weeks) and are
sold to investors by auction every week. Cyprus Treasury Bills are listed on the local
stock exchange (Cyprus Stock Exchange) on which they are also traded.
Cyprus Treasury Bills
(CYPTB)
Maturity
12m
2, 5, 10, 15Y
Day count
act/act
Security
CYPRUS
Euro MTN Cyprus Govt
International Bond (CYPRUS)
Day count
act/act
Coupon type
fix
Cpn frequency
annual
Issuance
occasionally
At present, there are six euro-denominated securities with maturities from 2015 to 2022
as Cyprus Govt. International Bonds (EUR 3.7bn in total). CYPRUS 3 ¾ 11/01/15 was
issued as a five-year bond and was the largest bond in this category, with a remaining
outstanding amount of EUR 863m until May 2015. A seven-year bond for EUR 1bn
(CYPRUS 3 7/8 05/06/22) has supplanted the previous bond. With the maturing of the
2015 bond, there is a substantial funding requirement at the current lower interest rates
in the last quarter of 2015.
6
6
5
5
4
4
3
3
2
2
1
1
0
06.2014
08.2014
10.2014
4 Yr
Source: Bloomberg, NORD/LB Fixed Income Research
12.2014
5 Yr
02.2015
04.2015
7 Yr
06.2015
0
08.2015
Yield (%)
Yield (%)
Cyprian Govt Bonds – Yields (%)
Gross debt vs. budget balance (%)
Total revenue vs. total expenditure (EURbn)
9
120
4
8
100
2
80
0
7
6
5
60
-2
40
-4
4
3
2
20
-6
0
-8
1
0
2005
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2006
2007
Net lending/borrowing (% of GDP, rhs)
Comment – Public finances
2009
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Government consolidated gross debt (% of GDP, lhs)
Source: Eurostat, NORD/LB Fixed Income Research
2008
2010
2011
2012
2013
2014
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
There is absolutely no doubt that Cyprus’s previous business model has failed. Cypriot
banks’ huge exposure to Greek government bonds proved disastrous. The haircut imposed on 9 March 2012 led to substantial losses meaning that the banks were only
saved from bankruptcy through government aid. Ultimately, Cyprus was no longer able
to fund itself. In the struggle for an international rescue package, temporary capital controls were introduced, which are only permitted in extreme cases according to EU regulations (Art. 66 TFEU) – and were repeated for Greece in 2015. Cyprus’s public services
are as oversized as its banking sector and must shrink further to become efficient. With
the help of income from natural gas deposits, the Mediterranean island has an opportunity to develop a viable structure.
Strengths & opportunities
Weaknesses & risks
+
Confirmed gas deposits
–
Economic links with Greece
+
Falling labour costs
–
(Still) high energy prices because of imports
+
Strong, developable tourism sector
–
Financial crisis has not been overcome
+
Good preconditions for renewable energies
–
Stricken banking sector
+
Well organised public administration
–
Unresolved Cyprus problem
–
Future natural gas exploration will exacerbate
relations with Turkey
Source: NORD/LB Fixed Income Research
Comment – Bond market
Cyprus government bonds have had extremely poor ratings for a long time. Cyprus was
unable to raise funding on the capital market for around one and a half years. The monetary union had rescued the Euro-member from bankruptcy with loans of around EUR
10bn in 2013. The international aid programme will expire in mid-2016. It needs to be
noted that Cyprus, which is very much smaller than Greece, is making great efforts to
present a positive picture not just in public but to investors in particular. The return to the
primary market has therefore been more than successful!
Malta
(Energy) Connection to Italy
Malta is divided into two
NUTS 3 regions:
With a GDP of EUR 7.3bn (2014), Malta, which has been a member of the EU since
2004, only contributes around 0.1% to the eurozone’s economic output. Malta is situated
south of Sicily and consists of seven islands, of which three are inhabited. Malta was a
British naval base until 1979. The country is still a member of the Commonwealth. Malta
complies with the Maastricht criteria in part at least (2.1% new debt in 2014) and in
terms of total debt (68% of GDP in 2014) is well below the eurozone average. Services
play a dominant role for the Maltese economy (including trade, banking and tourism).
Tourism alone has reliably contributed around a fifth to national GDP for years. The
Maltese economy is concentrated on the capital La Valetta, where the largest airport
(Luqa), among other amenities, is situated. Foreign trade relationships are centred on
the harbour, where even the largest types of shipping can dock. The energy sector is
dependent on crude oil imports from Italy and the UK. Electricity is generated on a selfsufficient basis; a connection to the Italian electricity system was inaugurated in April
2015, which broke Malta’s isolation as far as energy is concerned, meaning that direct
dependence on oil can be remedied in favour of an energy mix. This circumstance may
have relevant repercussions for Maltese government finances since Malta previously
had to significantly subsidise the single energy producer Enemalta, most notably to
compensate it for fluctuations in the oil price.
[MT0] Malta
[MT001] Malta
[MT002] Gozo and Comino
Country Profile
Value
1 Population (Mln. inhabitants)
0.4
2 Area (sq. km)
316
3 Gross Domestic Product (EURbn)
7.9
Gross value added by sectors (%)
Value
1 Trade, transport, accomodation, food serv.
21.0
2 Public admin, educ., human health, social
19.4
3 Industry (except construction)
12.8
4 Professional, scientific, technical activities
10.8
5 Arts, entertainment and recreation; other service activities
9.9
6 Financial and insurance activities
26.0
Balance of Payments, selected positions
A Current Account (EURbn)
A1 Goods (EURbn)
A2 Services (EURbn)
Travel (EURbn)
Transportation (EURbn)
Others (EURbn)
B Financial Account (EURbn)
Direct Investment (EURbn)
Portfolio Investment (EURbn)
Others (EURbn)
Value
0.11
-0.965
1.449
0.724
-0.017
0.699
0.005
-1.584
-2.297
3.911
1
2
3
4
5
6
7
8
9
10
Exports (Products)
EU19 mean
Weight
Exports (Countries)
Weight
Electrical machinery, apparatus and appliances, n.e.s., and
5.3%
electrical34.8%
parts thereof1(including
Germanynon-electrical counterparts, n.e.s.,
14.3%
of electrical household-type
Miscellaneous manufactured articles, n.e.s.; confidential3.7%
traffic of section
12.0%
8
2 Hong Kong
9.7%
Medicinal and pharmaceutical products
6.1%
11.8%
3 France
9.2%
Food, beverages and tobacco
9.0%
9.6%
4 Singapore
8.1%
Petroleum, petroleum products and related materials 5.5%
7.9%
5 Italy
6.6%
Other transport equipment; confidential traffic of section 3.8%
7
4.2%
6 USA
5.8%
Professional, scientific and controlling instruments and apparatus,
2.3%
n.e.s.
2.6%
7 Japan
5.2%
Rubber manufactures, n.e.s.
0.9%
2.2%
8 Libya
4.9%
General industrial machinery and equipment, n.e.s., and5.5%
machine parts,
1.7%
n.e.s.
9 United Kingdom
4.7%
Machinery specialized for particular industries
3.3%
1.6%
10 Netherlands
1.8%
1
2
3
4
5
6
7
8
9
10
Imports (Products)
EU19 mean
Weight
Imports (Countries)
Weight
Petroleum, petroleum products and related materials 12.0%
29.0%
1 Italy
22.8%
Other transport equipment; confidential traffic of section 3.0%
7
19.0%
2 USA
8.7%
Food, beverages and tobacco
8.6%
10.6%
3 United Kingdom
7.4%
Electrical machinery, apparatus and appliances, n.e.s., and
5.1%
electrical10.2%
parts thereof4(including
Canada non-electrical counterparts, n.e.s.,
5.9%
of electrical household-type
Miscellaneous manufactured articles, n.e.s.; confidential3.8%
traffic of section
3.1%
8
5 Germany
5.8%
Medicinal and pharmaceutical products
4.9%
2.5%
6 Spain
4.6%
Road vehicles (including air-cushion vehicles)
8.0%
2.4%
7 Netherlands
4.5%
General industrial machinery and equipment, n.e.s., and3.5%
machine parts,
1.9%
n.e.s.
8 France
4.4%
Paper, paperboard and articles of paper pulp, of paper or1.3%
of paperboard
1.7%
9 Greece
3.1%
Organic chemicals
3.0%
1.6%
10 China
3.1%
Source: Eurostat, NORD/LB Fixed Income Research; all data as at year-end 2014
EUR bonds Malta (EURbn) – Maturity profile
Ratings Overview
Outlook
Fitch
A
Stable
Moody’s
A3
Stable
BBB+
Positive
S&P
Last updated: 20 August 2015
2
Amount Outstanding (EURm)
LT
1
0
MALTTB
MALTA
2015
242
279
2016
12
418
2017
2018
2019
2020
2021
2022
2023
2024
2025
>2025
372
402
401
409
462
313
81
25
2
1,937
Source: Bloomberg, NORD/LB Fixed Income Research
Almost all debt securities
(total volume: EUR 4.7bn) are
held by Maltese
citizens
Maturity
1, 3, 6, 9, 12m
Security
MTB; MALTTB
Malta Treasury Bills
(MALTTB)
Maturity
4 to 20Y
3, 5Y
Malta Govt Stocks
(MALTA)
The Debt Management Office (DMO) acts as a funding agency and has existed as a
section within the Maltese Ministry of Finance since 2006. Currently, Malta has placed a
volume of around EUR 5.1bn. Malta Treasury Bills (issuance calendar T-bills) are offered on the money market. Maturities of one year and longer are covered by Malta
Government Stocks (MGS), which are announced at the beginning of the year in the
issuance calendar (MGS). The issuance of max. EUR 500m is planned for 2015, which
will be offset by redemptions of EUR 349.2m.
Day count
act/360
Coupon type
zero
Cpn frequency
discounted
Issuance
weekly, Tuesday
There are 26 Malta Treasury Bills (MALTTB) with a total volume of EUR 245.1m currently placed on the money market. Treasury Bills are auctioned once a week (on Tuesdays)
as a rule. On 1 October, the interval until settlement will be reduced from three to two
days. Standard maturities are 28, 91, 273 and 364 days with the focus being concentrated on quarterly maturities this year.
Security
MGS; MALTA
MGS; MALTA
Day count
act/act
act/360
Coupon type
fix
FRN (EUR006M)
Cpn frequency
semi-annual
semi-annual
Issuance
as announced
as announced
Malta Govt. Stocks (MGS; MALTA) have evolved into the island nation’s main funding
instrument. Currently, 56 (!) bonds with a total volume of only EUR 5.1bn have been
issued. MGS are offered on either a fixed interest basis (49 securities; EUR 4.8bn) or as
FRNs (7 securities; EUR 253.6m) and cover maturities of over a year. The FRNs’ performance is linked to 6M-Euribor. With a volume of EUR 459m, MALTA 5 08/08/21 is
nominally the largest bond. At present, MALTA 3 06/11/40 is the bond with the longest
residual maturity. Interest on MGS is paid every six months. Maltese government bonds
are listed on the national stock exchange (MLEX; Malta Exchange) and are also traded
over the exchange as a rule.
Gross debt vs. budget balance (% of GDP)
Total revenue vs. total expenditure (EURbn)
100
0
4
90
80
-1
3
70
60
-2
2
50
40
-3
1
30
20
-4
10
0
2005
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
-5
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Other revenue
Social contributions, receivable
Taxes on production and imports, receivable
Taxes on income, wealth, etc. receivable
Government consolidated gross debt (% of GDP, lhs)
Net lending/borrowing (% of GDP, rhs)
Source: Eurostat, NORD/LB Fixed Income Research
Comment – Public finances
Other expenditure
Capital transfers, payable
Interest, payable
Social benefits and social transfers
Compensation of employees, payable
Source: Eurostat, NORD/LB Fixed Income Research
While Malta is part of the single currency zone, it is scarcely comparable with most of the
other member states solely because of its geographic location and its meagre economic
output. In our opinion, the largest problem areas are the pension system for which plans
are only being drawn up at a snail’s pace and the substantial costs of supporting two
companies of strategic significance for the country (Enemalta, Air Malta). The energy link
with Sicily could provide perceptible relief in future. The health of the very large domestic
banking sector is of essential significance for government finances, especially given that
it absorbs government money and capital market securities at a rate well above average
compared with the rest of the eurozone. Risks here, in particular, must be identified at an
early stage.
Strengths & opportunities
Weaknesses & risks
+
–
+
Strong, sustainable tourism sector
New opportunities in energy policy through
connection to Italian electricity grid
–
Export dependency in the energy sector
Extreme drought leads to dependence on
water exports
+
Debt situation within appropriate bounds
–
Share of renewable energies not remarkable
+
Political stability
–
Small domestic market
+
Renewable energies as a growth market
–
Dependence on financial sector
Source: NORD/LB Fixed Income Research
Comment – Bond market
The Maltese market had not previously needed to draw foreign investors’ attention. The
volumes traded on the Maltese market, which are usually small, are of little interest to
foreign institutional investors. In any case, the fact that it is mainly Maltese who buy the
securities is not down to the rating, which is on the interface between A and BBB+.
Appendix
Rating Overview
Last updated: 20.08.2015
Moody’s
Fitch
S&P
Issuer
Germany
France
Italy
Spain
Netherlands
Belgium
Austria
Finland
Greece
Portugal
Ireland
Slovakia
Luxembourg
Slovenia
Latvia
Estonia
Cyprus
Malta
Rating
Date
Outlook
Date
Rating
Date
Outlook
Date
Rating
Date
Outlook
Date
AAA
AA
BBB+
BBB+
AAA
AA
AA+
AAA
CCC
BB+
AA+
AAA
BBB+
AA+
BA
10.08.94
12.12.14
08.03.13
25.04.14
10.08.94
27.01.12
13.02.15
05.08.98
18.08.15
24.11.11
15.08.14
08.07.08
10.08.94
17.05.13
20.06.14
05.07.11
03.06.13
20.09.13
stab
stab
stab
stab
stab
neg
stab
neg
stab
pos
pos
stab
stab
stab
stab
stab
pos
stab
06.11.07
12.12.14
25.04.14
25.04.14
11.07.14
14.11.14
13.02.15
20.03.15
18.08.15
11.04.14
07.08.15
08.07.08
02.05.08
02.05.14
20.06.14
05.07.11
24.04.14
20.09.13
Aaa
Aa1
Baa2
Baa2
Aaa
Aa3
Aaa
Aaa
Caa3
Ba1
Baa1
A2
Aaa
Baa3
A3
A1
Baa2
A3
29.04.93
19.11.12
13.07.12
21.02.14
05.05.98
16.12.11
26.06.77
05.04.98
01.07.15
25.07.14
16.05.14
13.02.12
28.07.99
23.01.15
13.02.15
23.04.09
21.02.14
13.02.12
stab
neg
stab
pos
stab
stab
stab
neg
neg
stab
stab
stab
stab
stab
stable
stab
pos
stab
28.02.14
19.11.12
14.02.14
21.02.14
07.03.14
16.12.11
28.02.14
05.06.15
01.07.15
25.07.14
16.05.14
04.10.13
28.02.14
23.01.15
13.02.15
31.03.10
21.02.14
04.10.13
AAAu
AAu
BBB-u
BBB
AA+u
AAu
AA+
AA+
CCC+
BBu
A+
A+
AAA
AAAABBB
BBB+
13.01.12
08.11.13
05.12.14
23.05.14
29.11.13
13.01.12
13.01.12
10.10.14
21.07.15
05.02.14
05.06.15
31.07.15
13.01.12
12.02.13
30.05.14
13.01.12
23.05.14
16.01.13
stab
neg
stab
stab
pos
stab
stab
stab
stab
pos
stab
stab
stab
pos
stab
stab
stab
pos
13.01.12
10.10.14
05.12.14
23.05.14
22.05.15
28.02.14
29.01.13
10.10.14
21.07.15
20.03.15
05.06.15
31.07.15
14.01.13
19.06.15
30.05.14
19.10.12
23.05.14
10.07.15
Appendix
Contacts
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be noted that the reported figures relate to past years.
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This Analysis does constitute investment research within the meaning of the definition section of the Cyprus Directive D1444-200701(No 426/07). Furthermore, this material is provided for informational and advertising purposes only and does not constitute an invitation or offer to sell or buy or subscribe any investment product.
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The information herein contained describes the view of the author at the time of its publication and it must not be used by its Recipient
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Past performance, simulations or forecasts are therefore not a reliable indicator of future results. Mutual funds have no guaranteed
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The value of your investments may fluctuate. Results achieved in the past do not offer any guarantee for the future (De waarde van uw
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This Analysis does not constitute a recommendation within the meaning of the Regulation of the Polish Minister of Finance Regarding
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The financial products described in this Analysis may not be offered or sold, directly or indirectly, to any resident of the Republic of Finland or in the Republic of Finland, except pursuant to applicable Finnish laws and regulations. Specifically, in the case of shares, those
shares may not be offered or sold, directly or indirectly, to the public in the Republic of Finland as defined in the Finnish Securities Market Act (746/2012, as amended). The value of investments may go up or down. There is no guarantee to get back the invested amount.
Past performance is no guarantee of future results.
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There is no guarantee to get back the invested amount. Past performance is no guarantee of future results. The value of investments
could go up and down
The information contained in this Analysis is provided on a non-reliance basis and its author does not accept any responsibility for its
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Time of going to press
31. August 2015, 08:59h
Disclosure of NORD/LB’s potential conflicts of interest according to § 34b Abs. 1 WpHG and
§ 5 FinAnV
None.
Additional disclosures
Sources and price indications
Depending on the issuer, we use information from financial data suppliers, our own estimates, company data and the public med ia for the
preparation of our financial analyses. Unless otherwise stated in the report, prices indicated relate to the closing price on the previous
day. Fees and commissions apply to securities (buy, sell, hold) and these may reduce the yield on investments.
Analytical methods and updates
In the preparation of financial analyses, we take company-specific methods used for fundamental securities’ analysis, quantitative/statistical methods and models, as well as technical analytical methods as the basis for valuations and for the regular updates. It
should be noted that the results of analyses provide a snapshot overview and that past developments do not constitute a reliable indic ator for future profits. The basis of the valuations is subject to unforeseen change at any time, potentially leading to different conclusions.
The present report is prepared on a yearly basis. Recipients are not automatically entitled to receive report update publications.
Recommendation system and history of last 12 months
Positive: Positive expectations for the issuer, a security type or a specific security of an issuer.
Neutral:
Neutral expectations for the issuer, a security type or a specific security of an issuer.
Negative: Negative expectations for the issuer, a security type or a specific security of an issuer.
Relative value (RV): Relative value recommendation in comparison to a market segment, an issuer or a maturity.
Issuer / security
Germany
France
Italy
Spain
Netherlands
Belgium
Austria
Finland
Ireland
Greece
Portugal
Slovakia
Luxembourg
Slovenia
Lithuania
Latvia
Estonia
Cyprus
Malta
Germany
Date
Recommendation
Bond type
Cause
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.08.2015
31.07.2015
Positive
Positive
Neutrale
Positive
Positive
Positive
Neutrale
Neutrale
Positive
Negative
Positive
Neutrale
Neutrale
Neutrale
Neutrale
Positive
Positive
Neutrale
Neutrale
Positive
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Government
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
France
Italy
Spain
France
Italy
Spain
Italy
Netherlands
Belgium
09.06.2015
09.06.2015
09.06.2015
22.10.2014
22.10.2014
22.10.2014
10.09.2014
10.09.2014
10.09.2014
Positive
Neutrale
Positive
Positive
Neutrale
Positive
Positive
Positive
Positive
Government
Government
Government
Government
Government
Government
Covered
Covered
Covered
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
Fundamental
RV
RV
RV