Hellenic Republic
Ministry of Finance
Public Debt Division
Recent Developments
in Public Debt Management
May 2000
GREECE - Ministry of Finance - Public Debt Division
Recent Developments in Public Debt Management
May 2000
2
CONTENTS
Contents ……………………………………………………………. 1
GENERAL …………………………………………………………. 2
A. CENTRAL GOVERNMENT DEBT
1. Policy Objectives …………………….…………………………. 4
2. Central Government Debt Structure …………………………….
6
2.a. Domestic Central Government Debt ………………………..
9
2.b. External Central Government Debt …………………………
10
B. RECENT DEVELOPMENTS
1. Borrowing activity in 2000 ….………………………………….. 11
1.a. Domestic Borrowing .………………………………………. 11
1.b. External Borrowing …………………………………………14
1.c. Other issues………………………………………………….
15
2. Further developments in the domestic market. ……….…………17
3. Primary and Secondary Markets-Issuance Procedures …………. 20
3.a. Primary Dealership ……………...………………………….. 20
3.b. Secondary Market-Electronic Trading System ………..……22
4. Taxation …………………………………………………………23
5. Redenomination of outstanding debt……………………………. 24
6. Establishment of a Debt Office………………………………….. 25
ANNEX
Debt instruments and their basic characteristics ...………………….. 26
GREECE - Ministry of Finance - Public Debt Division
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GENERAL
Greece, having already achieved nominal convergence, is ready for
participation in the Euro zone, thus sharing the benefits and responsibilities
that the common currency entails. The submission of the official request
for joining the Euro zone (March 2000), approved by both the European
Commission and the European Central Bank, and the recent revaluation of
drachma by 3.5% (January 2000), reflect the fact that Greece comfortably
satisfied (and in most cases by a large margin) the five Maastricht criteria.
With a 3.5% GDP growth (among the highest in EU) and a 1.6% budget
deficit in 1999 (compared to an initial budget estimation of 1.9%), despite
the Balkan crisis and the severe impact of the disastrous earthquake in
Athens, the greek economy demonstrates its momentum and sustainability,
thus confirming its steady course towards EMU.
Chart 1
General Government Debt and Deficit as % of GDP
(Convergence criteria)
0
2
4
6
8
10
12
102
104
106
108
110
112
114
General Government Debt as % of GDP
General
Government
Deficit
as %
of GDP
1999
1995
1996
1997
1998
2000*
* Provisional data
Concerning the general government debt as a % of GDP, Greece pursued
the reduction of the relevant ratio even further. After a decline by approx.
4% of the debt to GDP ratio in 1998, (outperforming the average reduction
among the EU member states), the ratio was further reduced to 104.1% in
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1999, mainly due to the significant rise of the primary surplus and the
icrease of the privatisation proceeds.
Moreover, the implementation of an effective management of debt, the
containment of state guarantees and a number of measures that have been
undertaken intended to deepen the capital market and improve the
operation of the primary and secondary bond market, have also contributed
to the rapid decline of the debt to GDP ratio.
The recent upgrade of Greece by Moody´s from Baa1 to A2 and Standard
& Poor's to A- from BBB for the long-term debt, reflects the country's
progress to date in implementing stability-oriented economic policies as
well as the high credibility that the greek ecomomy merits by the markets.
The country being on the path of rising growth driven by public and private
investment, the government's main objective remains the improvement of
welfare. To accomplish the economic aspects of this target, the government
implements a prudent fiscal policy while at the same time tries to meet
social needs through structural reforms, aiming at the creation of a more
innovative, dynamic and better performing economic environment.
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Recent Developments in Public Debt Management
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A. CENTRAL GOVERNMENT DEBT
In recent years the government's primary objective is to reduce the debt
to GDP ratio at a rapid pace. Since the government debt criterion should
be assessed not only by examining the path of the debt ratio but also by
analysing its underlying dynamics, the Ministry of Finance implements an
efective management of the oustanding central government debt, by setting
annual and long term targets and adopting policies, aiming primarily at a
more efficient restructuring of the debt and consequently at the reduction of
its servicing cost. The policy objectives, are described in the following
sections:
1. Policy objectives
a)
The restructuring of the outstanding debt (domestic and foreign)
b)
The extending of the average maturity of the debt structure and the
smoothening of payments for interest and amortization throughout the year
in order to allow greater flexibility. The range of debt instruments has been
broadened and the amount of T-Bills in circulation has been reduced,
having been replaced by longer maturity papers. In addition, prepayments
and reverse auctions of previous issues are conducted at a large extent in
order to relieve overburdened periods.
c)
The launch of significant privatisation operations and the use of
the proceeds to redeem the outstanding debt. These sales of government-
owned public enterprises are also accompanied by favourable side effects,
since they increase the efficiency of the ecocomic system and induce a
durable reduction of government transfers to these enterprises.
d) The improvement of the Government Securities Market. In view
of the increased competition arising from the integration of the euro bond
government market, the performance of the "national" market is determined
by factors such as the transparency of the primary market, the supply and
demand situation in the repo market, the hedging possibilities and the
implementation of electronic trading techniques. Hence, well developed
repo and futures markets are necessary for active trading and management
of interest rate risk.
Towards this end, the government has undertaken a number of measures
such as legal and institutional reforms, the abolition of withholding tax for
non-residents on bonds as well as on repo agreements, the operation of the
Electronic Trading System (HDAT), etc. in order to establish a modern
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bond market, which ensures flexibility, efficiency, speed and transparency
in transactions. All bond auctions (including reverse auctions) as well as an
increasing volume of transactions in the secondary market are already
conducted through the Electronic Trading System.
A repo market , also supported by the Electronic Trading System, has been
established, aiming at the reduction of price volatility and improved
liquidity. Finally, the Ministry, wishing to provide investors with a hedging
instrument, has established a market for Futures on the 10 year fixed rate
bonds (benchmark) , in the Athens Derivative Exchange, thus increasing
the liquidity of the bond market even more.
e) The reduction of servicing cost (payments for interest and
amortization).
Table 1
Interest Payments as % of GDP
1995
1996
1997
1998
1999
2000*
12,7%
11,8%
9,8%
9,1%
8,7%
8,0%
*
Estimates
The borrowing requirements are mainly financed through fixed interest rate
debt instruments, in order to reduce the effects of the interest-rate volatility
to the servicing cost of the debt. More sophisticated financial market
instruments (interest rate swaps, extention swaps etc.) are used in a later
stage for the management of risk. The reduced servicing payments and the
high primary budget surpluses resulted in the diminishing of the volume of
new borrowing as a percentage of GDP as shown in Chart 3.
Chart 2
New Borrowing as % of GDP
44%
45%
41%
22%
27%
32%
0%
10%
20%
30%
40%
50%
1995
1996
1997
1998
1999
2000*
* Estimates
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d)
In the State Budget a target is set every year concerning the annual
volume of the domestic and foreign new borrowing and the diversification
of debt instruments, reflecting the above policies of the Ministry of Finance
for the management of debt.
!
Domestic currency debt
The main objective in the domestic market is to offer investors
debt instruments which will induce a change in their preferences
towards long maturity fixed interest rate bonds. In this context , a
20 year fixed rate bond was issued in January 2000, aiming mainly
at institutional investors . Through the concentration on specific
segments of the maturity range , the government pursues the
development of a more liquid benchmark market, hence resulting
in the diminishing of their spreads versus benchmark bonds in the
Euro market (especially for the 10-year fixed interest rate bonds).
!
Domestic - foreign debt relationship
Concerning the foreign borrowing, the target set is to reduce the
foreign debt as a ratio to the overall outstanding debt at a level
below 20% as well as to achieve a more efficient structure of
currencies.
!
Retail investors oriented policy
The policy introduced in September 1998 in order to approach the
retail segment of the market and at the same time to change the
retail investors' preferences from short maturities (T-Bills) to
longer maturities, continues to be pursued by issuing saving
certficates and balladur type bonds.
2. Central Government Debt Structure.
The Central Government Debt as a % of GDP diminishes year by year at a
fast pace, as a result of the policy adopted and the high primary budget
surpluses. The evolution of both the Central and General Government Debt
shows in Table 2.
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Table 2
Evolution of Central and General Government Debt as % of GDP
1995
1996
1997
1998
1999
2000*
Central Gov. Debt
as % of GDP
117.4121.1118.2115.7114.9114.7
General Gov. Debt
as % of GDP
108.7111.3108.5105.4104.1103.3
* Estimates
The composition of Central and General Government Debt appears in
Table 3 below:
Table 3.
Central and General Government Debt
(in billions GRD; end of period)
Years
1996
1997
1998
1999
Α. Central Government Debt
36.24639.04041.55244.014
1. Treasury Bills
10.012
6.800
5.322
3.078
2. Government Bonds
14.74719.56322.64926.269
3. Bank of Greece and other loans
4.255
4.347
4.431
4.473
4. External Debt
7.232
8.330
9.15010.194
Β. Inter-governmental Debt
-2.923-3.198-3.718-4.111
C. General Government Debt (Α-Β) 33.32335.84237.83439.903
as % of GDP
111,3
108,5
105,4
104,1
GDP
29.93533.02135.91038.319
Apart from the reduction of the debt to GDP ratio, special efforts have been
undertaken for the restructuring of debt. In Chart 4 appears the gradual
substitution of short-term T-Bills by longer-term bonds. Hence, on
31/12/99 the volume of T-Bills accounted for only 6.99% of the total
outstanding debt, compared to 51.50% in 1990.
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Chart 3
Percentage Composition of Central Government Debt
T-Bills
Government Bonds
Bank of Greece
External Debt
0%
20%
40%
60%
80%
100%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Year
The composition of central government debt by major categories for the
years 1997-1999 appears in Table 4.
Table 4. Major categories of Central Government Debt, 1997-1999
Fixed
Floating
1997
47.4%
52.6%
1998
53.9%
46.1%
1999
60.1%
39.9%
Tradable
Non-tradable*
1997
81.9%
18.1%
1998
83.7%
16.3%
1999
79.3%
20.7%
Domestic
Foreign
1997
78.7%
21.3%
1998
78.0%
22.0%
1999
76.8%
23.2%
*Including Saving Certificates
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2.a. Domestic Central Government Debt
On the 30th April 2000 the domestic debt represented 74.7% of the total
debt whilst the foreign debt 25.3%, as illustrated in Chart 6.
Chart 4
Composition of Central Government Debt,
on 30-4-2000
Domestic
74,7%
External
25,3%
The composition of Domestic Central Government Debt on the 30th April
2000 appears in Chart 5. The tradable part represents 87.5% of the total
domestic debt, whereas the remainder concerns long-term obligations to the
Central Bank of Greece (old loans from exchange-rate differences) and
participation to International Institutions.
Chart 5
Composition of Domestic Central Government Debt on 30-4-2000
T-Bills
6,6%
Participation
to Int/l
Institutions
0,6%
Bonds
80,9%
Obligation to
the BoG
11,9%
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2. b. External Central Government Debt
The weighted average maturity of the external outstanding debt for 1999
was aprox. 7.7 years. This is due to the long maturities of recent external
borrowing, which range from 5 to 20 years.
On 30-4-2000 the external debt consisted mainly of US Dollars (20.8%),
EURO (28.8%), DEM (13.4%) and JPY (16.9%). The remainder
represented other european currencies.
The composition of the external central government debt (before swaps) by
currency appears in Chart 6.
Chart 6
Composition of External Government Debt,
on 30-4-2000, by currency.
USD
20,8%
DEM
13,4%
EURO
28,8%
JPY
16,9%
Other
20,1%
Due to the imminent participation of Greece in the EMU, serious efforts
have been undertaken towards the re-structuring of the composition of the
external debt through currency swaps, in favour of european currencies and
Euro.
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B. RECENT DEVELOPMENTS
The Ministry of Finance, continued its successful strategy implemented in
1999 and in the current year as well, pursuing a more effective
management of debt. The policies adopted were especially designed to take
into account three new parameters that are expected to strongly affect the
domestic primary and secondary bond markets, the repo and futures
markets and generally the whole economic scenery of the country:
♦ The creation of the euro bond market, presently considered to be the
second largest bond market in the world (after the US bond market).
♦ The imminent participation of Greece in the Eurozone and the
denomination of debt to Euro on 1-1-2001.
♦ The continued trend towards an increased resort to electronic trading as
well as the introduction of internet.
1. Borrowing activity in 2000
1.a. Domestic Borrowing
The first months of 2000 were characterised by a significant fall in the
short- and medium-term interest rates, due to the gradual convergence of
the greek economy to the european economies, in spite of the sharp
increase in the oil prices and the US dollar. This fact gave the Ministry of
Finance the chance to borrow at a significantly lower cost. (Chart 7).
Chart 7
Weighted average interest rate of domestic borrowing (Jan. 97-Mar. 00)
4
5
6
7
8
9
10
11
12
13
JFMAMJJASONDJF MAMJJ AS ONDJF MAMJJ AS ONDJFM
1997
1998
1999
2000
-5,5%
%
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During the period Jan. - Apr. 2000, the lengthening of the maturity of the
outstanding debt, was even further pursued. As a result, the volume of T-
Bills issued in this period, represents only 6.4% of the total new domestic
borrowing (Chart 8).
Chart 8
Distribution of Domestic Borrowing
(Jan.-April. 00)
Table 5
Percentage participation of T-Bills in new
domestic borrowing of the years 1995 - 2000*
1995
1996
1997
1998
1999
2000*
Volume of T-Bills
as a percentage of
new dom. borrowing
60.5%54.4%37.8%52.6%22.6%6.4%
*Data until 30/4/2000
As illustrated in Table 5, the percentage of T-Bills issued every year,
diminishes constantly, with the exception of the year 1998, when the
aftermath of the Asian crisis prevailed and the Russian default broke up.
The main volume of issues in year 2000 consists of fixed interest rate
bonds of different maturities, ranging from 2 to 20 years. Apart from the 2-
year maturity (Saving Certificates), which is exclusively addressed to retail
investors and hence placed by public subscription, all other maturities are
placed through auctions. The composition of fixed interest rate bonds
issued in 2000 appears in Chart 9.
T-Bills
6,4%
Fixed rate
bonds
93,6%
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Chart 9
Composition of Fixed Interest Rate Bonds
Issued in 2000*, by maturity
*Data until 30/4/2000
As a consequence, the weighted average maturity of the new
domestic borrowing increased to 8.55 years, significantly higher
compared to that of the previous years , as shown in Chart 10.
Chart 10
Weighted average maturity of the new domestic borrowing
for the years 1994 - 2000*
*Data until 30/4/2000
Due to the fact that the weighted average maturity of the external
borrowing in the current year is 10.58 years, the weighted average maturity
of the total new borrowing increased to 9.11 years.
2Y
1,3%
3Y
18,1%
5Y
23,3%
7Y
1,1%
10Y
33,1%
15Y
2,6%
20Y
20,5%
1,63
2,72
3,34
3,65
4,55
6,05
8,55
02468
10
1994
1995
1996
1997
1998
1999
2000
Maturity in years
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The volume of total gross borrowing in 2000 is estimated to be less than
GRD 9,000 billion, significantly lower compared to GRD 10,400 billion in
1999.
1.b. External Borrowing
At the beginning of March, Greece successfully launched a € 2.5 billion,
10-year Eurobond issue, with 6.0% fixed rate coupon. This bond issue,
after Greece's participation in the euro zone and the adoption of the single
currency, will be consolidated with the 10-year fixed bond issued 19 May
2000 in the domestic market under the same terms. The consolidated bond,
a benchmark issue to be, will be traded in the EuroMTS System, thus
strengthening the presence of Greece in the european bond market.
In this context, the external borrowing in 2000, was mainly conducted in
Euro (Chart 11).
Chart 11
Composition of External Borrowing, by Currency
(Jan.-April 2000)
USD
6,4%
EURO
85,0%
JPY
8,6%
The need for restructuring the currency composition of the external debt is
more than obvious. Firstly, upon joining the EMU, the Euro denominated
debt will be automatically considered as domestic debt. Secondly, the part
of debt denominated in other-than-Euro currency, must be to a great extent
hedged and of course at such a proportion, that any adverse exchange rate
fluctuations won't influence the then outstanding external debt in an
unfavourable or uncontrolled manner.
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Towards this end, in 2000, the Ministry of Finance focused on restructuring
the composition of the external debt, through currency and interest rate
swap deals.
1.c. Other issues
Buy-back of pre-war issued Loans
By decision of the Minister of Finance, the Greek State bought back the
existing pre-war issued Loans denominated in Drachmas (GRD), U.K.
Pounds (£) and U.S. Dollars ($). The outstanding balance of the above
Loans on 31-12-98 was:
Drachmas (GRD) 212.364.400
U.K. Pounds (£) 5.881.328
U.S. Dollars ($) 24.850.680
The buy-back was decided because of the imminent participation of Greece
in the EMU and the high cost of servicing the above Loans. By this
settlement, a long and difficult period in the history of Greece´s Public
Debt is coming to an end.
Privatisation Certificates (Balladur type bonds)
a) "Prometocha" Certificates
They were issued in 1998 in two tranches, a 5-year fixed interest rate
EURO/ECU denominated tranche for the european and international
market and a 3-year zero-coupon GRD denominated tranche for the
international and domestic market. The holder of the privatisation
certificates has the right at any time, from 1st January, 1999 to the
redemption date, to exchange them with privatisation shares of Greek
State-owned companies that are to be privatised within that period. They
offer certain privileges to the holder since he can acquire the privatisation
shares at discount and in priority of the non-holder.
The privatisation certificates holders have already been given the chance to
exchange their certificates with equities of state-owned companies four
times, of which the most recent are:
• In December 1999, on the occasion of the public offering of state-
owned shares of the ETBA Bank S.A. by the state-owned company
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DEKA S.A., the holders of privatisation certificates were given the right
to exchange them with shares, at a 5% discount on the offered price.The
privileged participation of the holders of both Drachma and Euro
denominated privatisation certificates in the public subscription, was
defined at 50% of the total number of 10,528,000 shares of the ETBA
Bank S.A., offered by DEKA S.A.
• Also in December, on the occasion of the public offering of state-
owned shares of the Watering and Drainage Corporation of Athens S.A.
(EYDAP S.A.) by the state-owned company DEKA S.A., the holders of
privatisation certificates were given the right to exchange them with
shares, at a 5% discount on the offered price.The privileged
participation of the holders of both Drachma and Euro denominated
privatisation certificates in the public subscription, was also defined
at 50% of the total number of 25,000,000 shares of the Watering and
Drainage Corporation of Athens S.A. (EYDAP S.A.), offered by
DEKA S.A.
b) "Agrometocha" Certificates
In May 2000, the Hellenic Republic issued 3-year, zero coupon, GRD
denomintated certificates in book-entry form, exchangeable into
Agricultural Bank of Greece shares. These certificates called
"Agrometocha" have a nominal value of GRD 100 and an initial purchase
price under par. The issue size was GRD 230 billion.
At any time from the issue date to the redemption date, the holders of
"Agrometocha" certificates shall have the right, to exchange them into state
-owned shares of the Agricultural Bank of Greece to be offered through
public subscription or private placement.
The "Agrometocha" certificates will be exchanged with shares at a 5%
discount on the offered price of the share. Moreover, the non-institutional
holders who will proceed with such an exchange, are entitled to 2 free
additional shares in every 10, on the condition that they hold the shares for
a period of 6 months.
The successful exchange of privatisation certificates with shares, will be
continued in the coming months, as Greece´s privatisation program
proceeds quickly.
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Buy-backs of Government Debt by DEKA S.A.
The state-owned company DEKA S.A. (share holder of state-owned
enterprises and organisations), used the revenues raised from privatisations
to buy back an equal amount of Greece's outstanding debt. This policy,
which led to a total buy-back of government debt of GRD 1,069.7 billion
during 1999, will be continued in the year 2000 as well.
2. Further developments in the domestic market
The Ministry of Finance, reassessing the role of primary dealers and other
market participants in the light of the creation of the integrated euro bond
market and the increased implementation of electronic transaction services,
has undertaken a number of measures such as:
♦ The amendment and further improvement of the Primary Dealers
Operation Regulation, as well as the increase of the number of Primary
Dealers from 9 to 12. The purpose was to encourage the existence of
healthy competition among the participating dealers in terms of lower
degree of concentration of the volume of issues purchased by dominant
dealers and of the different categories of investors to whom they
address.
♦ The exclusive resort to the Electronic Trading System (HDAT) to
conduct auctions and reverse auctions of government securities. This in
turn, resulted in a deep and active participation in the primary and
secondary bond market, ensuring the transparency of the procedure in
quoting prices, as well as the efficiency and speed in concluding the
transactions.
♦ The establishment of a repo market, operating as of 6/9/1999 through
the Electronic Secondary Market Trading System (HDAT), and aiming
at a more active and flexible secondary market.
♦ The creation of a Futures Market for the 10-year Fixed Interest Rate
bond (benchmark issue) in the Athens Derivative Exchange.
Besides, additional measures have been undertaken, aiming at the
restructuring of the institutional investors´ portfolios and of the domestic
debt as well, such as:
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♦ The implementation of buy-backs on a regular basis for the retirement
of previous issues.
♦ The valuation of the portfolios of mutual funds in mark-to-market
prices, which resulted in a sharp increase of their portfolio yields.
♦ The substitution of floating rate bond issues with long-term fixed
interest rate bonds.
♦
The substitution of bond issues held by state-owned Funds with stocks
of state-owned and other enterprises.
These measures have also had a positive effect on the behaviour of
domestic institutional investors, increasing their interest in government
bonds.
The most important of the above issues are discussed in detail below:
a. Reverse auctions
Reverse auctions (already initiated in 1998) for pre-announced specific
previous floating rate note issues, are conducted on a more systematic basis
and held within the Primary Dealership framework. This method turned out
to be very successful, as it provides opportunities for a more effective
management of excessive liquidity, withdrawal of small illiquid issues and
reduction of debt by direct purchase of existing paper.
Moreover, reverse auctions contribute to the proper allocation of borrowing
needs in order to avoid ''heavy months'' or heavy years.
b. Replacement of Floating Rate Notes with Fixed Interest Rate Bonds
The replacement of FRNs can take place through:
i)
auctions of fixed interest rate bonds. In such a case, the face value
of the volume of the specific issue to be substituted, is ''exchanged''
with an amount of fixed interest rate bonds at the weighted average
price of the auction. This method has been used recently for the
retirement of previously issued CPI-linked bonds.
ii)
bilateral agreements with institutional investors. The Ministry of
Finance gave insurance companies the opportunity to substitute
floating rate bond issues held in their portfolios with long-term fixed
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interest rate bonds. Respectively, similar agreements were
concluded for the substitution of floating rate notes held by state-
owned Funds with shares of state owned and other enterprises held
in the portfolio of DEKA A.E (state-owned and supervised
company, equity holder of state-owned enterprises and
organisations).
The purpose of these agreements is to re-structure the portfolios of
institutional investors in order to increase their yields and hence to
give them motives to become more active in the domestic market.
c. Buy-backs
Buy-backs are organised for the retirement of previous issues, which by
today's standards or market conditions are considered by the Ministry of
Finance to be expensive or unfavourable to maintain and serve. They
mostly concern specific issues (consolidated loans or other specific loans of
state-owned organisations) held in portfolios of institutional investors.
d. Establishment of a Repo market
As of 6/9/1999, a repo market is operating, supported by the Electronic
Secondary Market Trading System (HDAT). In order to ensure its smooth
operation, the 15% taxation applied on repo transactions between Banks
and their customers has already been abolished.
The efficiency of the repo market is of premier importance for the well
functioning of the secondary market for Government Bonds and Bills.
Repo and Reverse Repo, are obviously the main tool, if not the only one,
for the following issues: monetary policy operations, financing of long
positions (General Collateral) and coverage of short positions (specifics).
For these reasons, the repo market is playing an ever increasing role in both
the bond market and the money market. In that context, the need for
technically updating the settlement system was more than obvious, in order
to be able to cope with real time and fully secured repo operations.
Through HDAT, only transactions in the form of a ''buy/sell back'' repo
agreement are conducted. This form of repo agreement consists of two
separate transactions, one spot and one forward. While the agreement is in
force the coupon is paid to the holder of the underlying security.
The transactions concluded in HDAT can be:
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♦ Special repo agreements, in which the underlying security is defined
upon conclusion of the transaction.
♦ General repo agreements, in which the underlying security to be
transferred is not defined upon conclusion of the transaction, but at the
end of the business day.
The following 8 tenors are traded:
Tenor
Buy
Sell back
Overnight
T+0
T+1 (only for special repos)
Tom/next
T+1
T+2
Spot/next
T+2
T+3
Spot one week
T+2
(T+2)+7
Spot two weeks
T+2
(T+2)+14
Spot one month
T+2
(T+2)+30
Two months
T+2
(T+2)+60
Three months
T+2
(T+2)+90
The following tenors can also be traded: a) Intra-day, b) One week, c) Two
weeks, d) Spot next future, e) Next future and f) Over delivery. The
System, however, can support any other tenor that might be proposed by
the market.
The System, finally, provides any kind of information related to the
transactions concluded by each participant during the day, which is
necessary for their back office. It can also provide information on bids and
offers quoted during the day, their status, and the transactions concluded by
each member (available only to the counterparties) and general information
concerning data on concluded transactions such as the volume, the upper
and lower prices, etc.).
3. Primary and Secondary Market - Issuance procedures
3.a. Primary Dealership
In July 1997 the Greek parliament ratified the Law 2515/97, which
introduced the institutional framework for the functioning of Primary
Dealers and also improved the operation of the Primary and Secondary
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market. The same law established the Electronic Trading System and the
Committee for Supervision and Regulation.
In February 1999 the number of banks acting as Primary Dealers for
government debt increased from 9 to 14. However, after a probation period
only the 12 best performing banks will bear the status of a Primary Dealer.
The Primary Dealers are obliged to bid for the debt and may resell it in the
secondary market. The participants must have a minimum of GRD 100
billion in equity capital, and they must always participate in domestic debt
sales. Each Primary Dealer must trade at least 5% of the total volume of
transactions in the Secondary market per year, with a minimum amount of
GRD 300 billion per year. The main benefit from having Primary Dealer
status is that Primary Dealers have priority in obtaining securities. Their
most important obligations are the following:
♦ To participate actively in the auctions with competitive bids and absorb
any part of the issue left over after all bids have been allocated;
♦ To continually supply the secondary market during the trading hours by
giving bid/offer quotes to buy/sell securities for a nominal value of at
least GRD 1 billion and trade at these prices;
♦ To promote trading of government securities both domestically and
internationally;
♦ To provide detailed assessments of market conditions and thereby
indirectly aid the execution of monetary policy.
Since April 1998 the Ministry of Finance within the Primary Dealership
framework is using exclusively the auction technique for placing T-Bills
and Bonds in the Primary market. All the auctions are of the
competitive/multiple price type, and the successful bidders acquire the
amounts of securities and pay the prices they had bid according to the
Primary Dealer Operation Regulation.
Both Primary Dealers and Dealers may also submit a non-competitive bid,
where only the desired amount is indicated and they will receive all or part
of this amount on a pro rata basis (depending on the total demand), at the
weighted average auction price. The total amount offered to all noncompetitive
bidders cannot exceed 20% of the competitively auctioned
amount. The redemption of securities in book entry form takes place
automatically on the maturity date.
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A serious effort is undertaken to develop benchmark bond issues, through
consecutive re-openings of an initial issue, since the liquidity of an issue is
of great importance for its trading in the secondary market. An issue can be
considered as benchmark when it exceeds GRD 500 billion. Investors are
being offered more choice within the market as the breadth and depth of
securities being issued continues to be extended.
Since August 1998 the auctions take place every Tuesday and the
settlement date in both the primary and secondary market is three days after
the trade date (T+3).
The Ministry of Finance announces the auctions to be held on a two-month
basis issuance calendar. The auction results are released a few hours after
the auction and both the results and the issuance calendar are announced
through the Reuters screens and the economic press.
As of January 1999 the auctions are conducted through the Electronic
Trading System.
3.b. Secondary Market - Electronic Trading System
The Electronic Secondary Market Trading System commenced in May
1998. The system is based on the Italian ''Telematico'' system, and the
Primary Dealers have screens connected to the main server in the Bank of
Greece (BoG). During trading hours (10.15 am to 15.00 p.m. local time),
Primary Dealers and Dealers are quoting bids and offer prices and amounts
for a number of Greek Government securities. All participants close deals
directly through their computer terminals. When a deal is closed, the
system automatically matches the orders and sends the relevant
confirmation and enters the necessary transaction processes.
The system is designed to improve the transparency of the market as the
announcements of binding prices and amounts are accessible to all
interested parties (including Primary Dealers, Dealers, Control Committee,
BoG and the Ministry of Finance). The statistical information is accessible
only by the BoG and the Control Committee. The composition of the
Control Committee, which is responsible for the supervision and control of
the system for a two-year term, includes officials from the Ministry of
Finance, the BoG, the Ministry of National Economy, the primary dealers,
the dealers and the Hellenic Bank Association.
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4. Taxation
As of 1/1/99 (Law 2682/99), the withholding tax on interest for all bonds
issued by the Hellenic Republic is abolished for non-resident investors. The
abolition applies also to the coupons of the existing bond issues, which are
yet to be paid. This resulted in the taxation alignment of Greece to that of
the other member states of the EU, since Greece was the only country
imposing a withholding tax on interest for domestic bonds held by nonresident
investors.
The aforementioned law, was the last of a series of laws aiming at
simplifying the procedures of taxation and at the same time at giving the
investors strong motivation to invest in Greek securities by making them
more attractive. A brief reference of the recent legislation is made below:
i)
Under the Law 2579/98 the withholding tax rate was increased from
7.5% to 10% on T-Bills and bonds issued after the 3rd January
1998. The withholding tax is imposed on interest from Greek
Government T-Bills and treasury bonds. For fixed interest rate
bonds, coupons are paid net of withholding tax, whilst for T-Bills it
is deducted at issue date. For zero-coupon bonds it is deducted at
maturity. The withholding tax is not imposed to any original price
discount.
ii)
Under the Law 2592/98 the withholding tax on interest for all Greek
Government securities issued in the european or international
market is abolished.
iii) Under the Law 2628/98 the withholding tax on interest for all
domestic issues with maturity of two years or longer is also
abolished under the condition that the initial investor will hold the
security from the date of issue to the date of redemption.
iv) Under the Law 2642/98 the 15% taxation imposed on interest earned
on repos for domestic investors is abolished. Prior to the imposition
of taxation in April 1994, the repo market was very active and
popular with domestic private investors. Repos offered an excellent
opportunity for investment since they:
" had short-term maturities (1 week up to 1 month)
" provided the possibility of compounding interest; and
"
the minimum investment amount required was only GRD 5
million.
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The abolishment of taxation is aiming at reviving the repo market and at
using it as an alternative vehicle for investors to fund their positions in the
bond market.
Greece has negotiated double tax relief treaties with 22 countries. The
agreements vary across the countries, although the underlying objective for
all is to avoid overseas investors paying double tax both by Greek and by
their own tax authorities concerning dividends, interest and royalties. The
tax rate applicable is the lowest of the rates in the specified treaty between
the two countries.
5. Redenomination of outstanding debt
5.a. Basic Plans
Greece will redenominate the whole stock of Central Government
marketable Debt registered at the Book-entry System. All references
(issues) of T-Bills and Government Bonds, will be simultaneously
redenominated into euros. This should take place on 1st January 2001.
Towards this end, the Ministry of Finance proceeded with the elaboration
of a time-table describing in detail the actions to be taken by involved
parties for the redenomination of debt into euro with the «Bottom-up»
method. In addition pilot programs have been already accomplished, whilst
real-environment applications are scheduled within this year. At the same
time, the preparation of both the balance and the budget of central
government debt in euro, was successfully accomplished. A brief reference
to the «Bottom-up» redenomination method is made below:
5.b Method of redenomination
The redenomination procedure will be based upon individual holding (that
is, holding by individual investors) of each reference of Central
Government Securities. Though every single security issued by the Central
Government will be redenominated at a later stage (once all the individual
holdings in the Book-entry system have been redenominated), a procedure
based upon redenomination of individual holding of each debt reference
turns out to be less distorting than one based upon direct redenomination of
every single security.
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When redenominating individual holding into euros, roundings will be
inevitable. In this case, roundings will apply to individual holding at the
level of the cent of euro (up or down depending on the case).
5.c. «Bottom up» approach.
The global face value of the stock of Central Government Securities
redenominated into euros will be the addition of every single individual
holding of all the references already redenominated into euros. Given that
roundings will take place on individual holdings this approach leads to the
fact that the addition of all the individual holdings of Central Government
Securities (that is, the new nominal stock of euro-denominated Central
Government Debt) does not necessarily have to be the same as the stock
which would result from a single redenomination to euros of the total stock
of Central Government's securities as a whole.
6. Establishment of a Debt Office
The Debt Office, which was established by Law 2628/98 as a separate
public entity under the supervision of the Minister of Finance, is managed
by an appointed 5-member Board of Directrors, with the Secretary General
of the Ministry of Finance acting as chairman.
The Debt Office started operating in July 1999, and its main task (within
the guidelines dictated by the Annual State Budget) is the effective
management of debt and consequently the reduction of both the cost
borrowing and the cost of servicing of the debt.
In fulfilling its task, the Debt Office reports directly to the Minister of
Finance and co-operates closely with the Public Debt Division, the Budget
Division and the Deposit Management Division of the Ministry of Finance.
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ANNEX
DEBT INSTRUMENTS AND THEIR BASIC CHARACTERISTICS
# Zero-coupon Bonds (introduced on 20 January 1997)
At the end of January 1997 (20/1/1997), the range of debt instrument was
broadened with the introduction of two-year Zero-coupon bonds. The new
securities were usually issued once a month together with T-Bills.
Zero-coupon Bonds were offered to the investors by public subscription as
they were mainly addressing retail investors, as T-Bills. By issuing Zero-
coupon Bonds the Ministry of Finance, apart from satisfying the investors'
needs better, was aiming at the containing of the volume of T-Bills whose
roll-over reached more than 9 trillion GRD at the end of 1996, by
substituting them with paper of longer maturity.
Zero-coupon Bonds in fact, allowed investors to re-allocate part of their
savings invested in T-Bills with the usual maturities of 3, 6 and 12 months
in a paper of longer maturity.
The last zero-coupon issue took place on July 1, 1997.
# Fixed rate Bonds (introduced November 1996).
They were first issued on 26 November 1996 and they are now available in
2, 3, 5, 7, 10 and 15-year maturities.
The Ministry of Finance introduced the five and seven-year fixed rate
bonds in March 1997 and in June 1997 introduced the 10-year fixed rate
bonds. The three-year fixed-interest rate bonds were introduced earlier on
November 22, 1996. The two and fifteen-year fixed rate bonds were issued
in February and May 1998, respectively. Their issuance is in line with the
efforts of the Ministry to extend the average duration of the Central
Government Debt.
Moreover, they offer benchmark securities adequate for meaningful
comparative analysis with other European markets. Commercial Banks and
Institutional investors are the major buyers of these government securities.
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Fixed rate bonds bear annual coupons and are redeemed at par at maturity.
#
Consumer Price Index-linked Bonds (introduced on 19 May 1997).
In May 1997, after extensive consultation with potential investors and other
interested parties, the Ministry of Finance issued a new type of marketable
book-entry security with a nominal return linked to the inflation rate. This
is the Consumer Price Index-linked bonds (CPI-linked Bonds) or in other
words the State Bonds Index Linked (SBIL)
The inflation-protection securities structure is based, more or less, on the
U.S. Treasury and Swedish model. They offer a degree of inflation
protection that is not currently available with other Greek government
Bonds and are bought by investors who seek a hedge against an anticipated
rise in inflation.
The value of the principal will be adjusted for changes in the level of
inflation and every twelve months the security will pay interest, which will
be an amount equal to a fixed percentage (4% for the four existing issues),
of the inflation-adjusted value of the principal. So every year interest
payments are determined by multiplying the inflation adjusted principal by
4% real rate of interest. The inflation adjusted principal amount of the
securities can be calculated daily. However, the inflation adjustment (the
capital uplift) will not be payable until maturity. The final payment will not
be less than the original par amount of the security at issuance.
The index for measuring the inflation rate is the National Consumer Price
Index (CPI). CPI was selected by the Ministry of Finance because it is the
best known and most widely accepted measure of inflation.
Only the annual interest payment (based on the real interest rate
percentage) on Index linked bonds is taxable to the holder of securities
when received. The up lift of the principal, which is adjusted for inflation
from the date of issuance to the maturity date, although considered as
interest, is tax-exempt.
The first issuance of CPI-linked bonds was on May 19, 1997 with
maturities of five and ten years and they were placed in the primary market
by subscription.
Due to the rapid de-escalation of inflation in Greece the CPI-linked bonds
are no longer issued.
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# Treasury Bills
Treasury Bills are short-term securities with maturities of 3, 6 and 12
months. T-Bills are issued at a discount from face value (par amounts) and
redeemed at their face value at maturity. They are issued in a minimum
purchase amount of 100,000 GRD face value, and multiple amounts.
Retail investors are the main buyers of T-bills. Approximately 90% of
each issue is offered to small investors. State pension funds also invest a
significant volume of their assets in T-bills.
Unlike in the previous years, when T-Bills were placed by public
subscription and their interest rate was defined administratively, presently
(as from October 1997), T-bills are issued only through multiple price
auctions.
# Floating Rate Government Bonds in GRD (FR-Bonds)
Floating Rate bonds, being medium and long term bonds with maturities of
3, 5 and 7 years, were issued by a multiple price auction.
Institutional investors are the main buyers of the FR-bonds. Their annual
coupon is calculated by adding a fixed spread for the life of the bond, on
the 12-month T-bill rate of interest, prevailing three days prior to the reset
date of the coupon. Spreads of new bond issues are reviewed regularly by
the Ministry of Finance. From June 6, 1997 they were reduced to: 0.20%,
0.40% and 0.80%, for bonds with maturities 3, 5 and 7 years respectively.
Institutional investors typically prefer FR-bonds stripped of their first (or
all) coupons. A lively stripped FR-bonds market and stripped coupon
market accommodates them. A Reuters multi-contributors page of FR-
bonds quotes serves as reasonable revaluation tool for banks and other
portfolios.
During this period, multiple bid auctions of floating rate government bonds
with maturity of 3, 5, and 7 years were held successfully. The last auction
of floating rate bonds was held on October 21, 1997.
# 2-year Saving Certificates
Saving Certificates are relatively new instruments since they were issued
for the first time in September 1998 and are addressed almost exclusively
to retail investors. Their basic characteristics are the following:
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i)
They are tax-free if kept by the holder till their maturity
ii)
They can be instantly liquidated at any time. If liquidated within 60
days from the date of issuance, no interest is paid for this period
iii) They have a small nominal value, thus making them accessible to the
retail investor
iv) no investor can be underwritten for more than 15 million GRD per
issue.
Saving certificates were well accepted by retail investors, which is reflected
by the fact that their volume, issued within a period of almost one year,
amounts already to more than GRD 1 trillion.