ECB EZB EKT BCE EKP BOND MARKETS AND LONG-TERM INTEREST RATES IN EUROPEAN UNION ACCESSION COUNTRIES October 2003 Bond markets and long-term interest rates in EU accession countries October 2003 © European Central Bank, 2003 Address Kaiserstrasse 29 D-60311 Frankfurt am Main Germany Postal address Postfach 16 03 19 D-60066 Frankfurt am Main Germany Telephone +49 69 1344 0 Internet http://www.ecb.int Fax +49 69 1344 6000 Telex 411 144 ecb d All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank. ISSN 1725-5414 (print) ISSN 1725-5422 (online) Cover.pmd 4 22.09.03, 12:18 Contents Introduction 7 I National reports of EU accession countries 13 Bulgaria 15 1. Market size 16 2. Activity in the primary and secondary markets 17 3. Calculation of the yield 22 4. Interest rates 22 5. Authorities involved in bond issuance, bond management and securities market supervision 24 Cyprus 25 1. Market size 26 2. Activity in the primary and secondary markets 29 3. Calculation of the yield 35 4. Interest rates 35 5. Authorities involved in bond issuance, bond management and securities market supervision 38 Czech Republic 39 1. Market size 40 2. Activity in the primary and secondary markets 41 3. Calculation of the yield 45 4. Interest rates 45 5. Authorities involved in bond issuance, bond management and securities market supervision 48 Estonia 49 1. Market size 50 2. Activity in the primary and secondary markets 50 3. Calculation of the yield 56 4. Interest rates 58 5. Authorities involved in bond issuance, bond management and securities market supervision 58 Hungary 61 1. Market size 62 2. Activity in the primary and secondary markets 63 3. Calculation of the yield 69 ECB • Bond markets and long-term interest rates in EU accession countries • October 2003 3 4. Interest rates 71 5. Authorities involved in bond issuance, bond management and securities market supervision 73 Latvia 75 1. Market size 76 2. Activity in the primary and secondary markets 77 3. Calculation of the yield 83 4. Interest rates 83 5. Authorities involved in bond issuance, bond management and securities market supervision 84 Lithuania 87 1. Market size 88 2. Activity in the primary and secondary markets 89 3. Calculation of the yield 93 4. Interest rates 93 5. Authorities involved in bond issuance, bond management and securities market supervision 95 Malta 97 1. Market size 98 2. Activity in the primary and secondary markets 98 3. Calculation of the yield 103 4. Interest rates 104 5. Authorities involved in bond issuance, bond management and securities market supervision 106 Poland 107 1. Market size 108 2. Activity in the primary and secondary markets 109 3. Calculation of the yield 114 4. Interest rates 114 5. Authorities involved in bond issuance, bond management and securities market supervision 116 Romania 117 1. Market size 118 2. Activity in the primary and secondary markets 118 3. Calculation of the yield 124 4 ECB • Bond markets and long-term interest rates in EU accession countries • October 2003 4. Interest rates 124 5. Authorities involved in bond issuance, bond management and securities market supervision 124 Slovakia 127 1. Market size 128 2. Activity in the primary and secondary markets 128 3. Calculation of the yield 133 4. Interest rates 134 5. Authorities involved in bond issuance, bond management and securities market supervision 136 Slovenia 137 1. Market size 138 2. Activity in the primary and secondary markets 138 3. Calculation of the yield 143 4. Interest rates 143 5. Authorities involved in bond issuance, bond management and securities market supervision 145 II. Statistical Tables 1 to 4 147 Bulgaria 150 Cyprus 160 Czech Republic 170 Estonia 180 Hungary 188 Latvia 198 Lithuania 206 Malta 214 Poland 222 Romania 232 Slovakia 240 Slovenia 248 ECB • Bond markets and long-term interest rates in EU accession countries • October 2003 5 III. Annexes 257 Annex I - Concepts and definitions 259 Annex 2 - Macroeconomic indicators for the EU accession countries 267 Documents published by the European Central Bank 270 List of contact persons 286 6 ECB • Bond markets and long-term interest rates in EU accession countries • October 2003 Introduction Background The fourth Maastricht criterion2 is based on the level of long-term interest rates (LTIR). The fifth round of European Union (EU) According to Article 4 of Protocol No. 21 of the enlargement is well under way. There are Treaty, compliance with the fourth convergence currently 12 countries in central and eastern criterion shall mean that, observed over a period Europe and in the Mediterranean region that of one year before the examination, a Member have been recognised by the European Council State has had an average nominal LTIR that does as countries for accession to the European not exceed by more than 2 percentage points that Union. Ten of them (the "acceding countries") of, at most, the three best performing Member have been invited to join the European Union States in terms of price stability. Interest rates shall on 1 May 2004, following the signing and be measured on the basis of long-term government subsequent ratification of the Accession Treaty1. bonds or comparable securities, taking into account All these new EU Member States are also aiming differences in national definitions. to eventually adopt the euro, once they have achieved a high degree of sustainable economic Given the need to produce harmonised long- convergence. This is assessed on the basis of the term interest rate series for convergence "Maastricht convergence criteria" set out in reporting purposes, the European Central Bank Article 121 of the Treaty establishing the (ECB) (DG Statistics) and the European European Community ("the Treaty") and further Commission (Eurostat) agreed, together with detailed in a Protocol attached to the Treaty. the national central banks (NCBs) of the accession countries, to work towards the The four criteria specified in the Treaty will identification of representative debt securities apply to the acceding countries joining the that can be used to measure long-term nominal European Union, and there will be a regular interest rates and, if necessary, proxies. The assessment of the Member States' obligations relevant statistics must be available before towards Economic and Monetary Union (EMU). acceding countries join the European Union. Working towards measuring long-term interest rate convergence in EU accession countries The Treaty and Protocol wording had to be preparations for Stage Three of EMU for the interpreted in statistical terms before it could be current EU Member States. These principles are applied for the generation of comparable defined using seven key concepts and their results. associated recommendations. While according to the Protocol the provision of statistics for convergence purposes is the The purpose of these principles is to ensure the responsibility of the European Commission, the comparability of accession country statistics, ECB acts as an intermediary and works with the taking into account developments and accession country NCBs to develop the opportunities in the various national capital conceptual and practical aspects relating to the markets. production of comparable statistics on long- term interest rates. The statistical framework for the definition of 1 For the sake of convenience, all 12 countries will still be the long-term interest rates of accession referred to in this publication as "accession countries". countries closely follows the principles that 2 The fourth indent of Article 121 of the Treaty refers to "the durability of convergence achieved by the Member State were specified and implemented in close liaison and of its participation in the exchange rate mechanism of with the European Commission as part of the the European Monetary System being reflected in the long- term interest rate levels." ECB • Bond markets and long-term interest rates in EU accession countries • October 2003 7 Table 1 Statistical framework for defining the long-term interest rates Ref. Concept Recommendation 1 Bond issuer The bond should be issued by the central government. 2 Maturity The maturity should be as close as possible to ten years’ residual maturity. Any replacement of bonds should minimise maturity drift. 3 Coupon effects No direct adjustment. 4 Taxation Gross of tax. 5 Choice of bonds The applied bonds should be sufficiently liquid. This requirement should determine the choice between benchmark or sample approaches, depending on national market conditions; special feature bonds are to be omitted. 6 Yield formula The “yield to maturity” ISMA formula 6.3 should be applied. 7 Aggregation Where there is more than one bond in the sample, a simple average of the yields should be used to produce the representative rate. Recommendations Bond issuer choosing the maturity, the structural liquidity of the market must also be considered. If the 10- According to the Treaty, the bonds used for the year segment is not sufficiently liquid, it may be calculation of the yield for the purposes of the appropriate to choose a different segment close convergence criterion should be "long-term to the agreed maturity range, if the market for government bonds or comparable securities". this issue is considerably more liquid at that Long-term government bonds should always be point in time. used for the calculation of yields. Alternative solutions may only be considered if these bonds Coupon effects are not available, e.g. bonds issued by other general government, comparable securities or, if There is a positive relationship between coupon necessary, proxies. This approach is based on and price, and an inverse relationship between the economic assumption that government price and yield.