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14 | ifr special report | April 2008 NON-CORE BOND MARKETS ROUNDTABLE

question of the size of bonds, it is just a question of timing. When there is stress, people will really have to see how they can cope best with this environment. Obviously, with the stress test in the

core markets, we saw how liquidity faded in jumbo Pfandbriefe: one of the biggest European markets suddenly suffered a liquidity drain nobody even dreamt of. Suddenly, you are long €50m, which was a usual quote on two ticks a while back, but is now nearly unsellable because nobody will put a price on it. This is not true for every trading house, obviously, but if you look at the market, liquidity has nothing to do with size, it really has to do with the stress test at the moment, and how the individual trading houses can cope with this. I have had the experience of there

being three of us left in our market – and two of them are here today. Whether the new ones can really stand the crisis, we will have to see. It is probably also a question of economics. At some stage, certain banks will run numbers to see whether this step into new markets makes sense eco- nomically. And they might decide at some stage that maybe they should pull back rather than keeping on playing the game. This is what we have seen very often: people disappear, and once the markets run fine and smoothly again, they come back. And prices are all over the place in between.

IFR: So, you are basically saying that this is artificial liquidity?

Holger Kron: Yes, in the end, liquidity comes down to the formula; can the individual house make a price on this asset and would they really take the bonds on the balance sheet?

Moti Jungreis: It comes down to infra- structure with the underwriters as well. If you have one person who is going to be the underwriter, the swap trader, the sales guy, everything, you are not going to last. If you have an infrastructure with risk limits, underwriting limits and swap pricing abilities, then you show commitment, and then I think you can actually survive the stress, and you actually may see opportunities in a crisis. If your job is just to be long a few

bonds of KfW, you are not going to survive. If your job is also to take risk around it, you may make money in times

I have had the experience of there

being three of us left in our market – and two of them are here today. Whether the new ones can really stand the crisis, we will have to see.

of crisis. You can actually really make it work to your advantage. It doesn’t have to be that every time there is a crisis, you as an underwriter have to suffer. The opposite is true.

Holger Kron: I remember the crisis in the rand markets: often you had just two prices on the system, or maybe three or four. In good times, everybody traded it, and in bad times suddenly nobody wanted to. You could even call good houses and sometimes nobody picked up. It is just a reality that financials have to secure themselves at some stage and one of the ways of doing this is pulling back and waiting for things to level out before the next stage.

Alexander Liebethal: For an issuer like KfW, it is also important to have a mutual monitoring of the houses. It is also about diversification when it comes into intermediaries. So, all in all, it is a good thing if there is a broader base of banks we can work together with. However, it is sometimes difficult to find the right lead manager.

Paul Johnson: Banks have to be committed to markets and all markets get stressed. For an investment bank with the right infrastructure, a stressed market is a great opportunity. There is no doubt about that.

Isabelle Laurent: I think it is an advantage when people start dipping a toe in the market with one of the more liquid

issuers, because it is very easy for an issuer, for instance, like EBRD, actually to improve the levels at which they are prepared to buy back bonds during the crisis: we cannot always rely on investment banks having the liquidity to buy back all bonds at all times. It is not really appropriate to assume that that is going to be possible, so it is important for us to be able to ensure that our investors can get out if they want to by being able to underpin markets. In fact, last summer we improved

the levels at which we were prepared to buy back our bonds to allow investors, if they really needed to sell, at least to be able to get out of them. We saw almost nothing for the first six months and when the crisis deepened we started seeing little bits; nothing majorly significant, but I think that it only goes to show how difficult it has been to sell many of the instruments that hitherto they thought were sellable. And size is not an issue.

Horst Seissinger: It is even more interesting for KfW having more market participants and liquidity in the markets. It is not our policy to buy back bonds: our major task is to fund. And if you have to fund a large sum, then, of course, the major task is not to buy back bonds. That is a task we happily give to the investment banks! What we have seen over the last one

to two years is an increasing number of banks coming into these markets, and I share the view that there are differences in quality, with some banks being on track, while others still have to develop and show commitment in difficult situations. But, overall, we believe that the competition has increased over the last two years and that is to the benefit of the market.

IFR: What you have to do is believe that those new players are serious about it, but the investment banks must have their own suspicions about who is likely still to be standing when the market becomes stressed.

Holger Kron: There is a check-list of how often certain names have disappeared during crises over the last 15 years. In a number of cases you can say: this is a name which will definitely disappear once times get rocky.

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