The End of ECB Purchases and Why Finland Is Already PreparedBy and
Finland plans new 10-year bond in second half of 2017
Treasury targets maturity profiles that will work when QE ends
One day, the European Central Bank will no longer be the backbone of Europe’s bond market and anyone who grew too comfortable with that support will be in for a shock.
In the northernmost tip of the euro zone, a country known for very long winters says it’s already trying to operate as though quantitative easing had ended.
The Finnish Treasury has “decided to deliberately look past” the ECB’s QE program “in terms of our allocation management,” Teppo Koivisto, director of finance, said in an interview in Helsinki last week.
The Eurosystem of central banks that does the ECB’s bond buying now holds about a quarter of Finland’s sovereign debt, according to Koivisto. Across the whole euro zone, ECB purchases have sucked up 2.3 trillion euros ($2.6 trillion) of the region’s public and private sector debt.
Koivisto says the Finnish Treasury has worked hard to keep its focus on other investors, with offshore holders making up about 90 percent of the country’s bonds not held by the ECB.
“We don’t want to lull ourselves into thinking that demand is always going to be like it is right now,” Koivisto said.
The key is to create an issuance framework that is sustainable even after the ECB withdraws, he said. And while the Treasury has been criticized by Nordea for not taking advantage of QE to extend its debt maturities, Koivisto says it’s more important to target maturity profiles that don’t get the Treasury into trouble once the ECB retreats.
“Given maintaining a liquid benchmark bond curve is a priority and our funding need is a given size, we can maintain a sensible liquid curve up to 30 years, but not really beyond,” said Anu Sammallahti, deputy funding director at the Treasury. “A longer bond would reduce that liquidity.”
That said, Finland’s Treasury has managed to raise the average maturity of its debt to about six years from roughly four years in 2010. The longest maturity it offers is 30 years, and that’s likely to remain the case, according to Sammallahti.
Finland’s strategy is to be a frequent borrower, ensuring market access under any circumstances. That requires a loyal and committed investor circle. With ECB purchases distorting market prices and clouding demand dynamics, Finland says investors appreciate an honest picture of the risk they’re taking on when they buy. Koivisto says he always makes clear to investors in Finnish bonds that there are risks. These include a rapidly aging population, a lost decade of economic growth and a rigid labor market.
“We’ve always taken the approach to investor communications of talking more about the challenges than the positive issues, because our rating is still very good,” Koivisto said. “A certain overly honest approach has worked well on the markets and it’s allowed us to win the trust of many investors.”
Finland has completed about 44 percent of its target of about 17 billion euros of gross long-term debt for this year. It’s planning a new 10-year bond in euros in the second half, as well as two auctions of existing debt, Sammallahti said. The Treasury is also considering issuing a dollar bond, she said.