Finnish Sterling Bond

Finnish sterling bond issue leads trend

By David Oakley

Published: March 22 2010 18:22 | Last updated: March 22 2010 18:22

Finland has issued the first sterling bond by a government outside the UK in six years as record levels of debt make it harder for sovereigns to attract buyers in their domestic currencies.

The Finnish deal, which saw twice the demand for the £500m ($754m) raised, may pave the way for more similar transactions as other eurozone governments seek to diversify and attract new pools of buyers.

Myles Clarke, head of bond syndicate at RBS, said: “Countries such as Finland are looking to diversify and find other investors as issuance in eurozone debt rises sharply. This is a trend that is likely to continue.”

Finland paid only 3 basis points over the sterling London interbank offered rate in a five-year floating rate deal. This was cheaper than raising money in euros because of attractive terms in the basis swaps market. Finland immediately swapped the money raised back into euros, but at a cheaper rate.

A large chunk of the demand came from British investors, such as pension funds, Swiss retail investors and central banks. This is a different pool of investors to those who would typically buy Finnish bonds denominated in euros.

So far this year, three eurozone governments – Belgium, Italy and Portugal – have issued debt in dollars, with expectations that Germany, France and Spain are preparing to raise money in the US currency over the coming weeks.

With a record €1,000bn ($1,355bn) in issuance expected from eurozone states this year, sovereign debt managers are increasingly looking at different regions to attract buyers in a crowded marketplace. Last year, Germany, Spain, Belgium, Austria, Italy and Portugal launched dollar-denominated deals.

Barclays Capital forecasts that up to $20bn will be issued in dollars by eurozone countries this year compared with $12.5bn last year, $7.6bn in 2008 and only $2bn in 2007.

Although European governments are likely to choose the dollar for fund raising, the Swiss franc, the yen and sterling are also being considered.

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http://www.ft.com/cms/s/0/66d9a250-35de-11df-aa43-00144feabdc0.html

"Old Europe"...The Finnish side in a picture

Number of persons aged under 15 in Finland’s population in 1875–2009

According to Statistics Finland, the number of persons aged under 15 in Finland’s population is the lowest in over 100 years.

This post should be put into context with what was said in a previous post: "Population Perspective"

"Red light" for the Housing Market

"IN 1625, Pieter Fransz built a house in Amsterdam’s new Herengracht neighborhood. As the Dutch Republic rose to global power in the 1620s—with Amsterdam developing the world’s first major stock market as well as commodities and futures markets—the price of the house doubled in less than a decade.

Over the succeeding three centuries, the price of Fransz’s house was knocked down by wars, recessions, and financial crises and rose again in their aftermaths (Shorto, 2006).

When the house changed hands in the 1980s, its real value, that is after inflation, had only doubled over the course of 350 years––offering a very modest rate of return on the investment."

"From a historical perspective, it is not the trend but the volatility in housing prices that is distinctive"

"Starting in the late 1990s, prices of houses in Herengracht, and more generally in Amsterdam, doubled in value in 10 years, only to begin another sharp decline. This recent run-up and correction in prices in Amsterdam was part of a global boom and bust in house prices.", loungani, March 2010

A good lesson can be draw out of this article - After all it's all about equilibrium, what goes above or below its long term average tend to correct toward it. Somehow this what I have been suggesting all along in this blog see this post.

1- The ostrich effect


I think humans somehow behave like ostrich, they derive a strategy based on a very limited amount of information and tend to extrapolate it: like the ostrich that put its head in a hole and thinks it's safe...

Instead, this blog try to give you a eye bird view, a 10 000 mile view that allow you to see the whole picture... at least not to become an ostrich.

2- The FeedBack Effect

"One reason house prices go up so rapidly is that the supply of housing cannot be adjusted quickly.

Another reason lies in the interaction of housing and financial markets. Because houses serve as collateral, an increase in house prices can have a feedback effect: once collateral values increase, banks are willing to lend even more to households, which feeds the house price boom.

This feedback effect can arise regardless of what caused house prices to go up in the first place—demand momentum, government policies such as low interest rates, or institutional changes that increase the availability of mortgage credit."

We are spot on with regard to the causes and the effect it created. Clearly the mortgage market grew faster than the supply of housing , then the wealth effect took hold pushing price higher and higher in a similar fashion as in the musical chair game; when the music ends, one is set to lose and lose big in this case.

3- The conclusion

"First, house prices in most countries still remain well above the levels observed at the beginning of the upturn in the early 2000s. Second, house prices remain above rents and incomes, which, as discussed above, often serve as long-run anchors for prices. (...)

"That leads to an uncomfortable conclusion: house prices in many countries still have room to fall."

I think it is clear that from this point any rise in housing price is only strenghtening the case for the current housing bubble, but more worryingly bigger it grows, more damage will be inflicted to the economy.

Higher inflation, A "Stark" View ...

"... While I do see the temptation for governments to ask for higher inflation in order to monetise the dramatic build-up of public debt, let us not forget that it serves to expropriate the income and wealth of the general public to the benefit of those who have lived beyond their means.

I can only reject the idea of raising inflation rates permanently. I would not like to imagine the consequences if, on top of the current financial fragilities and in an environment of high public debt, the general public were to lose trust in the purchasing power of money..." ,Jürgen Stark

This guy is a member of the Executive Board of the ECB (European Central Bank) and will most probably succeed Trichet as the next president of the ECB in 2011...which is reassuring, in term of inflation fighter thus will not allow a 70's type high inflation scenario (which is anyway not possible due to the population and growth configuration supported by a more globalisation business model).

So what? ... one will dare to say, somewhere in the background...

High debt, growing debt is unsustainable and it is what the current housing market is suggesting to do and so is the current way of living ... "beyond their means"...while salary are deflating or at best stabilizing ( stabilizing which is inconsistent with the current economical climate - one will discover that in the year or two to come)

Historical ...slump

"The Finnish economy experienced a decline last year that is deeper than any that has taken place in any single 12-month period since the Civil War which followed the country’s independence.

According to figures put out by Statistics Finland, total production in Finland declined by 7.8 per cent last year.

Only in 1917-1918 has total output declined by more.

Not even in the economic crisis of the 1990s, nor in the Second World War, did the Finnish economy fall as steeply in a single year as it did in 2009... read the rest@ hs"

... Not sure what will be the price to pay for that in the years to come... Any idea?

"... Meanwhile, Finland’s Minister of Labour Anni Sinnemäki (Green) said on Monday that she hopes that unemployment in Finland will peak by the middle of this year.

“If this does not happen, and if it does not peak until next year, we will be in serious trouble”, said Sinnemäki at a meeting of EU competition ministers in Brussels."

...Strange, who will be in serious trouble?... Any idea?

The Housing Market, a Population Perspective : Part 1

The outlook for the housing market ( and indirectly for the Finnish economy as a whole) in the longer term are pretty grim, due particularly to its demography and population characteristics.

I will try to highligh few areas that are of interest in this domain. Let's first project ourself in the future to understand how the population will evolve (Part 1) and then extract the causes of why it is that way (part 2) and its implication on the housing market (part 1 & 2).

This is a quick analysis, if you have some information or any interpretation you are welcome to enrich the discussion.

First let's look at the population as projected by the European Statistic Agency (View Source).

The projecton scenarios are based on assumptions for fertility, mortality and migration. The method used for population projections is the "cohort-component" method as stated in their web site.


Based on that raw data, here is a graph where I added important facts:


Based on the projection, one could clearly see that the need to build in greater amount new dwellings has no ground. Obvioulsy, some Finnish economists or politicians have been lately voicing the contrary - maybe to add oil to the fire to the current housing bubble?

So I want to highlight here, it is the fact that intuitively we would think that there is a need to build more and more housing since wrongly we think that the population will be greater in the future than now...we just extrapolate in a linear manner - (in)fortunately the human way of thinking is linear - we think in a very simple manner (it is even more true for politicians).

Moreover, this analysis takes the most optimistic perspective (not taking into account household formation which obvioulsy will drastically reduce the need of housing starts).

So what are the implications? are we building too much? would the supply excess the demand?

Let's have a look at the housing permit that were given for 2009 as found in Statistics Finland web site (view source) :



So no there is no excess supply and the contruction builder have understood it and have ramped down the number of construction. Most probably, they are looking abroad for keeping their shareholders happy or changing their business model into for example building railways or metro (guess who will win most of the contracts and who is going to pay for it?)...

Obviously at the end it all lies on one particular parameter : Immigration as we will see in part 2 the fertility rate in Finland can barely keep the population at the same level...so stop reading, act :->

Additionaly , immigration may also imply lower affordability level which could obvioulsy impact prices over time...