Investors hailed the decisive nature of the political response by financial authorities and sovereign borrowers to the global public health crisis. This response was all the more impressive as it was not repeated at all.
Marcus Svedberg, investment strategist at Sweden’s Fourth National Pension Fund, told a recent OMFIF event on European sovereign debt that a recurring topic of conversation between his colleagues between March and May 2020 centered on speed of the political response to the pandemic. This contrasts sharply with the previous upheavals. “In Europe and the United States, the political response to the global financial crisis has been disappointing,” he said. “During the recent crisis, it was overwhelming. In times of stress, such reassurance is absolutely essential for investors. ‘
Others agreed, suggesting that the way the policy response was choreographed by finance ministries, central banks and issuers created a symbiosis that generated a high level of investor support for high volumes of sovereign debt. “Central banks have played a huge role in stabilizing the market,” said Sir Robert Stheeman, managing director of the UK Debt Management Office.
In 2020-2021, the UK sold nearly £ 500bn of gilts, more than double the previous record. The success of this program and the issuance of other sovereigns should not be attributed entirely to direct central bank support, Stheeman said. “This was more due to the stabilizing influence of the central bank’s purchases in the background, which encouraged real investors – domestic and international – to enter the market.”
The stability of the sovereign and supranational primary market was supported throughout the crisis by the coordinated issuance strategies of the main issuers in this crowded market. “It is impossible to avoid situations where there is a completely competing offer,” said Cristina Casalinho, CEO of the Portuguese Treasury and Debt Management Office. “For example, one day this year, we had to market a large unionized contract on the same day as Italy. But I am satisfied with the formal and informal coordination between the issuers. ‘
Panelists agreed that the prospect of tightening monetary policy in response to rising inflation is starting to be reflected in some pockets of the bond market. “We are starting to see more choppy waters in some of the less liquid asset classes,” said Friedrich Luithlen, head of debt capital markets at DZ BANK. “In covered bonds and some of the smaller markets in sub-Saharan Africa, books are no longer routinely oversubscribed by a factor of three or four. Uncertainty over budget deficits, economic growth and the central bank bond buying program are all starting to have an effect. ‘
Sovereign debt managers at the OMFIF meeting felt that their financing programs are well equipped to withstand the impact of these influences and a normalization of yield curves for at least two reasons. Casalinho said the first of these is that for several years sovereign borrowers have successfully defended themselves against less accommodating markets by canceling their debt and cultivating a large and diverse investor audience.
She said that in the case of Portugal, the anchor of this investor base is the buying investors, who have been a notable source of support since the sovereign’s return to investment grade in 2016. But she added that the contribution made by more speculative accounts should not be overlooked by sovereign borrowers. “People tend to stigmatize hedge funds, but they play an important role in providing liquidity,” she said.
Casalinho added that the economic outlook should be another source of comfort for sovereign borrowers. “We will not see rates rise unless there is an economic recovery,” she said. “This will allow a decrease in debt relative to gross domestic product, a reduction in budget deficits and therefore a decrease in borrowing needs.”
Others are not so sure. “We absolutely have to start worrying about the debt,” Svedberg said. He noted that according to the latest figures from the Institute of International Finance, global debt has now reached 355% of GDP, which he said is well above the total reached after the 2008 financial crisis. “That is huge, and that means we will soon have to see fiscal consolidation, ”Svedberg said. “The timing and extent will vary from country to country across Europe and could be politically difficult.”
Philip Moore is Associate Editor-in-Chief at OMFIF.