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June 2008 | ifr special report | 3 SOVEREIGN BOND MARKETS ROUNDTABLE

Sovereign bond markets

IFR: What has happened over the last six or nine months in terms of the way sovereigns have approached the market and the differing levels which have been involved in relation to spreads to Bunds and to Libor? And are there any differences in the way you approach the market to achieve your funding objectives as a result of these changes?

Anne Leclercq (Belgian Debt Agency): Yes and no. We have to achieve our funding objectives, but we have to be more flexible and do things differently to an extent. We have to be more flexible in terms of sizes: we cannot always do the size that we want to do, but if the market does not take the size we want we will reduce the size and go on to next time, eventually, for a bigger size. Also with regard to maturities – and I am speaking more precisely about the auctions – we always listen to our primary dealers to know what kind of maturity would be suitable for them, and what kind of maturities they would like to have us issuing.

For example, in an auction which we did last September, we listened even more carefully to our primary dealers. Some of them seemed to have some positions in a non-benchmark issue and wanted to close those positions, so we issued a non- benchmark size, which is not really the normal way of doing it. So through flexibility we have tried to help them out to make sure that they were able to close their existing short positions. I would say there is not so much difference in terms of the sizes, but we have to be flexible and listen more to the markets now than we used to.

IFR: I suppose the same will be true of all the sovereigns represented. At the end of the day, you will borrow whatever is required but there are obviously different approaches represented here between syndication and the Dutch direct auction (DDA) process, for example.

Peter Nijsse (DTSA): Yes, I think the direct auction is a very good technique for new issuance in the current turbulent markets, where we see the end investors able to be

satisfied directly by the auction process. We have also seen a large share of real money investors, so while trading books may have diminished in their significance, end investors have been looking for a safe haven and have come into the DDA process as a result of this.

There is not so much difference in terms of the sizes, but we have to be flexible and listen more to the markets now than we used to.

IFR: The evolution of the direct auction process has obviously been a separate development from the syndicated route used by some other sovereigns. Is it not one that the DTSA is contemplating going down?

Nijsse:We are quite happy with the way the DDA has worked out. I'm not quite sure whether it is so different in the end from the syndicated route. The main difference that we see is in the end we act as the bookrunner, with end investors able to deal directly with us. They don't have to show business to others, only the banks with which they registering their bids know what they are bidding. So we feel it is a method to reach out directly to the end investor, which benefits the banks, and the trading books are maybe less eager to buy. In terms of our programme we haven't seen too much difficulty in conducting our issuance programme. We've done it more or less as we intended and as we announced in our outlook in December, so we have been able to issue the size that we wanted to issue. Of course there has been some volatility in the markets, so maybe there are some weeks which are better than others. But we feel that by being predictable in our auction approach, we remove the element of surprise from the auction process.

IFR: It seems to be that predictability is the essence, to an extent, of sovereign borrowing programmes by knowing what's occurring, although there remains an element of surprise. This week Italy has done a three year US dollar deal. From a trading point of view is there any kind of difference in the secondary liquidity of deals which, perhaps by virtue of syndication, have been placed with long term buy and hold accounts?

Christophe Rivoire (HSBC): It is clear that, compared to a year ago, the market has changed dramatically in terms of liquidity. The risk appetite of a lot of market participants – not only the banks, but hedge funds and even the sovereigns – has been impacted, albeit less than other asset classes, due to the quality of the assets. It is clear that the liquidity has changed and that the debts of all the sovereign issuers have changed, and are still changing in a sense. This means that to use an auction process, a syndication process, or a DDA process as in the Netherlands, the buyers are going to be different.

What is clear is that when you issue by auction, in 80 % or 90 % of the cases the dealers are going to take the position. They are also going to keep it for a certain period of time. Due to the fact that the dealers are in between the issuers and the investors, their target is obviously to sell it to the investors, but they are limited to satisfying the demand when the demand comes. When issues are syndicated, or sold through the DDA process, it is clear that the issuers are going to reach for end customer demand immediately, which means that for banks, they are going to reduce the risk they have on their own books. Due to the fact that the market is now less liquid, the banks are more concerned by this fact. It is not only the terms of the liquidity of the debt, but also the liquidity in terms of refinancing these positions. All positions have a cost in terms of liquidity, and any position will have a cost in terms of risk and in terms of value at risk. I think it is important to keep in mind the fact that, due to the explosion of the volatility we have seen in the last 12

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