TRANSCRIPT: Interview with Belgian Debt Agency’s Maric Post, Director Treasury and Capital Markets, on 06 October 2021

12 October, 2021

By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on October 6 with Maric Post, Director Treasury and Capital Markets at the Belgian Debt Agency:

Q: The Kingdom of Belgium is very well advanced in its 2021 funding; can you confirm that no additional syndications are due this year and that you intend to finish the plan with only auctions, i.e no third syndication?

A: Yes, correct. Barring any unexpected events, we will stick to the plan we announced in December. We’ve been able to stick to it throughout the year without needing to adapt it, so it was well calibrated from the start. Probably like in many other countries, we’ve seen some better income fiscally, but at the same time costs that remain higher than may have been anticipated. But all in all, it leads to a situation where we can follow the funding plan without any issues.

Q: So no additional pre-funding for 2022?

A: No, we had already planned for quite a significant amount of pre-funding. We face fluctuations in the amounts that we need to fund over the coming years, with some very high-redemption years and some low-redemption years. So we had already anticipated to buy back quite a significant amount of debt maturing next year, and there’s no need to increase that for certain.

Q: Should we expect the usual 10-year syndication in mid-January - it’s kind of a tradition?

A: It is something of a tradition indeed. It’s no secret that we like to be out there with our liquid benchmark early in the year. At the same time, we also always warn our primary dealers that we -and they know this – like to keep all of our options open. We’re not committed in the absolute to launching 10 years first, and in that respect we always warn them always to expect the unexpected. But I agree that it is a tradition that we typically – and I think in the last 10 years always – have issued our 10-year first in the year.

Q: Can you say anything about your further 2022 syndication plans?

A: It is a little bit early. The work internally is still going on, and then of course it’s also the policy of the Belgian Debt Agency to announce the funding plan first to our primary dealers, which is always somewhere in the first half of December. So from that perspective, not much to say at this stage. From the colour on the budget deficit amounts that are expected in the coming years, which can easily be derived from the assumptions by the Monitoring Committee for the Budget in Belgium and of course the redemptions that we have in coming years, it shows that we can expect a funding plan for the coming years on the same order of magnitude as this year.

Q: And maturities of particular focus going forward?

A: Well, Belgium is a country that has worked very hard at lengthening the average maturity of its debt portfolio over a number of years. We had attained an average maturity of very close to ten years in the past two or three years and had basically said that we are happy at that kind of level and don’t really need to extend it any further. But at the beginning of this year, with the increase in the amount of debt that we saw last year, and with rates still being where they are, we took the decision to extend it even a little bit further. And since we’ve moved from 9.8 to around 10.3 years now, which is probably the kind of level where we’ll end the year and is certainly very satisfying. It’s in line with what we had hoped to achieve, and we were able to achieve it because of the very long average maturity of the issuance this year, more than 18 years, helped a lot of course by the 50-year transaction that we did at the beginning of the year. But still, it’s a very significant length of maturity and we’re very happy to have been able to achieve that.

Q: Would you envision extending it further next year?

A: Not necessarily. We’re very aware of the fact that it gets very difficult to keep pushing it even further out. It would mean that you need to issue in very long maturities on almost continuous basis, and we want to be realistic. At the same time, given the fact that we still have important redemptions next year and important deficits, even with a slightly lower average issuance maturity next year, it would still help us to keep the maturity around the level where we are. So the most likely scenario is that we will hover around this kind of level for a while, and we’re happy with that. We’re not pushing to extend it out any further. The level we will be getting at towards the end of this year, slightly above 10 years, puts us in a very comfortable position. That’s where we also feel that we should be, given the amount of debt and the high debt-to-GDP ratio that we have in Belgium. We find it important that that is matched by high average maturity to smooth out the redemption risks as much as possible.

Q: How much difference has the PEPP made for Belgium?

A: I think it’s made a huge difference for everyone. If you look particularly at Belgium, the purchases made by the asset purchase programmes of the ECB since early 2020 account for something like two thirds of our gross issuance. Obviously, the market impact is huge. We can also see in the volumes that we see traded on the secondary market the role played by the ECB. It doesn’t get reported to us, but we do see that it is huge compared to the rest of the flows. So again, it has a huge impact, and we’re happy to have had that support in this time of crisis. Especially in March last year, the intervention of the ECB and the European Union was critical in containing the crisis and putting things on a sustainable path.

Q: Is for you the crisis phase of the pandemic over in the sense that the ECB could withdraw its support without too big an impact on Belgium?

A: It will have an impact of course. If currently two thirds of gross issuance end up in the pockets of the ECB, there will be a very big adjustment by the markets to a situation where that diminishes. Can that be managed? I think so. I think the central banks are doing a great job of preparing the markets for their next moves. And of course, we’ve seen it before, in the period before 2020, when there was tapering by the central banks and we saw the other investors stepping in again and the normal market dynamics taking over again from the central banks. So in that respect, I believe in the functioning of the market. If and when the ECB decides to diminish its purchases, the other participants will be there to take their place back in our market.

Q: But you assume that at least part of the slack left by the expiry of the PEPP will be taken up by an expanded APP, no?

A: Well, there’s the mechanics of how the ECB wants to taper, and I can imagine that there’s a case to say, “Maybe we should transfer some of the PEPP’s flexibility to the APP.” I don’t know whether that’s realistic, given the context of the ECB’s mandate. But that is up to them to consider. Either way, I would see the market as able to deal with that and take up the place that’s been occupied by the central bank.

Q: So we don’t need to be worried about Belgium, but are you concerned about what might happen to certain other countries?

A: That is certainly an element that the central bank takes into account. I believe that it is part of how they see their mandate, and from that perspective, it’s not an immediate worry for me.

Q: How do you measure the success of issuance?

A: We look at a lot of data, both in terms of pricing of our auctions and things like simple volume metrics. From all these elements, we’re very satisfied with the way the market continues to function. We don’t see any particularities that would have changed significantly over the past couple of years. In terms of the syndications, we have continued to see huge appetite for our deals. There is of course talk about the sheer size of some of the orders that are being put in the syndicated books. But in the end, for now it only strengthens the way in which we can bring our deals to the market. It can lead to some difficulties in interpreting what it means to see a certain book size if it reaches €50 billion or €60 billion. Everyone knows that a lot of that is fast money. At the same time, we also see that the good quality orders have also increased over the past couple of years, even if it’s not to the same extent, which shows that demand has been there every time for the syndicated transactions. So in that respect as well, we continue to be happy with the way things have been.

Q: Back in 2016 you issued a 100-year private placement. Might you replicate this in the public markets?

A: No, not in a public format. We’ve debated that internally and the outcome up to now has always been that we want to stick to a liquid curve up to 50 years. Beyond that, we feel, would be very much a niche market, and sure, you will be able to tap that from time to time, but at the same time, imposing any quoting obligations on our dealers in that kind of maturities goes beyond what we would want to do anyway. So, we’re quite comfortable with the way we are addressing that market. We can issue EMTN or Schuldscheine in that kind of maturities, and we find the occasional demand there. And we remain very happy with the possibility to do that at rate levels that are interesting. I think all in all, we’ve issued €500 million in that 100-year bucket over the last couple of years in a number of tranches. If you’re able to lock in any kind of rates below 2% on the 100-year maturity, it’s interesting as a signal in terms of investor trust in Belgian credit, and at the same time it’s an interesting funding level for such a maturity. So we’ve been very happy with those transactions.

Q: So, 50 years is the upper limit.

A: For the public deals, so for our OLO curve, we wouldn’t go beyond the 50-year. That is, we feel, the point to which we feel we can ask our market makers to provide a liquid market to the investors. So, for us, that’s the final point of our curve.

Q: Are there any investor segments not being reached that you’d like to reach? Are you happy in general with your investor base?

A: Yes, for many years we’ve had a dealer group that certainly reaches, we feel, all of the available investor pockets. We cannot say that there are any specific geographies or customer types we’re not reaching. So, from that perspective we’re very happy. And that is also an element that throughout the years remains fairly stable. Of course, if you look at the underlying trends with respect to where the volumes are going up or down, you see some waves from year to year or from one couple of years to another couple of years. It’s the same with geographies. But all in all, the activity that we see in the market is very stable.

Q: What can be expected from Belgium going forward in terms of green issuance?

A: On green, we were one of the early issuers, back in 2018. We’re currently being asked by our minister to look at the possibility of a new green bond. This is now under consideration. For Belgium, a constraint is the availability of green expenditures at the federal level. Many of the policies that can address the environmental objectives are situated at the regional level, which leaves us with available green expenditures at the federal level that are fairly limited. It allowed us for annual issuance on the order of €2 billion, which is fine when you’re tapping an existing bond. What we’re looking at currently is the availability of green expenditures that we have if we are to launch a new green OLO, and that will require some further work.

Q: Is there a volume range you have in mind?

A: No, I think what we expect is that the range of available green expenditures at federal level will probably remain on the same order of magnitude. Of course, what we are currently doing is screening to consider them in the light of everything that’s been going on in the green market, i.e. the taxonomy and the fact that we already have technical screening criteria for a number of expenditures. And so we’re taking a close look at how that envelope of available green expenditures would or will change if we look at it under the latest taxonomy rules and see if we still have the same amounts available, which I would expect to be the approximately the case.

Q: And as far as the timeline goes, we’re looking at some time next year?

A: Well, that’s under study for the moment, whether next year would be feasible. For the moment, there’s preliminary work that we need to do on the expenditure side. It will depend on that whether next year is a possibility or not.

Q: How big a topic for you is dollar-denominated issuance?

A: It’s something that we like to consider whenever it’s possible, but we are bound by the rules that we have that allow us to issue in other formats than our OLOs only when it leads to a cost advantage. So, that means that we need to take into consideration the cost after swap of any foreign currency issuance. And for the last two years, it’s been very difficult to beat the funding cost of the OLO curve with European government bonds being so expensive that it’s getting very hard to issue in another currency and beat that funding cost. But our dealers are always on the lookout for opportunities there, and if and when they arise, we can act quickly and we’re happy to issue in, for example, the dollar market.

Q: And how important is retail issuance?

A: We’ve always felt that it’s important to have it on the shelf and we continue to do that. At the same time, we have to be realistic that with current rate levels, demand isn’t there or is extremely marginal. But it is an instrument that we do want to keep as a possibility for the future. When rates rise again, there’s a certain demand for that in Belgium that we will continue to tap into. Like we’ve always said and been able to show in the past, it’s important to have that instrument as a signal also to the markets that we have a population that has a lot of wealth and is willing to put that wealth to work in federal paper if they feel that the markets are pushing the issuance cost too far from fundamentals in Belgium, which is what happened in 2011. For that reason too, it’s certainly a product we want to keep on the shelf to be able to tap into.

Q: Does the competing supply from the EU under the NGEU worry you?

A: On the one hand, it’s a new issuer, but at the same time, it’s also to some extent a substitution of other issuance. So all in all, I think it’s not really something for us to worry about. I think the market is there for this particular issuer as well. The important thing is of course that it’s another issuer in terms of new syndications, in terms of auctions, so it’s important to talk to each other, to make sure that there is communication about that issuance. But we’re very happy with the way that that has been going so far. And we think that there’s room for all of us in this EGB market.

Q: DBRS sees a negative outlook for Belgium’s credit rating. How big a concern is this?

A: Obviously, ratings are important and there’s no doubt about that. We follow that very closely. We give a lot of information to the rating agencies. All in all, we’re very happy that the current fundamentals were sufficient for Fitch to up their outlook back to stable.

Q: Belgium’s debt-to-GDP ratio is significantly higher than the euro area average. Are you getting any negative feedback regarding this?

A: It’s something that of course stands out, but it’s also something that we’ve had for a very long time already in Belgium. We have a long history of having a debt-to-GDP ratio that at certain times in the 1980s and 1990s was well above 130%. In that respect it’s nothing new and I think the investors are well used to that. It is certainly something that is always looked at in the context of Belgium as being a rich country with a diversified economy, with a very wealthy population and very favourable net international investor position. The combination of all of these elements are what investors look at when they consider Belgium. What is important and what has always been the case is that government are committed to this path of controlling the debt-to-GDP ratio, and they have shown that in the past. Just before the crisis, we had been on a long journey back to just below 100%, which was reached just when the crisis broke out. So from that perspective, this will set us back to a level around 114%. And of course, once again, it will be a matter of starting to work to consolidate that and getting it back slowly towards more comfortable levels.

Q: You have just one OLO auction date left this year after having just done one, which basically means that Belgium will have sold 30.1bn in the first six months of 2021 and peanuts in the final six months. Was such front-loading intentional?

A: In addition to the remaining regular OLO auction, we have one optional reverse inquiry facility auction, which is a smaller auction and purely at the demand of the dealers. If they have the need to buy certain bonds, then they can make a request and we have the discretion to tap these bonds or not. These are more limited amounts, but can still be up to €500 million each time, so it is an additional source of funding. On the subject of front-loading, it’s also something we’ve done in the past quite regularly. If you look back, I think indeed over the first half of the year we typically fund more than two-thirds of our total funding needs. There are a couple of reasons for that. If you look at the auctions part of that, that is spread out much more evenly throughout the year, there we will probably have quite even amounts issued throughout the year. What really makes a difference is the syndicated deals that we have in the past indeed tended to do mostly in the first half of the year. And that is also just very practical because that is also when we have the biggest outflows in terms of our fiscal spending. From that perspective, it helps us to issue at a faster pace at the beginning of the year to match that increased outflow at the beginning of the year. So, I would say it’s a little bit like with our 10-year issuance early every year: it’s a bit of a tradition and it’s something that suits us well for now. But I would say again to always expect the unexpected; we can of course always change that. For now it is something that suits the way in which we need to work. I would add that certainly last year, there was of course a big element of uncertainty that we needed to manage. That was still to some extent present in the current year. It made sense to fund a little bit faster and make sure that if there were any unpleasant surprises in terms of spending, then we are well funded. It turned out that this year that wasn’t needed so much, but last year it made a lot of sense to have that prudence built into our cash management.

Q: How do you make decisions regarding buybacks?

A: We try to smooth out the redemptions that we have from year to year. They’re not always the same; in the coming years we have quite extreme swings in terms of redemption amounts from one year to another. So, we try to steer that a little bit with the help of either buybacks, when we bring that forward or push it out a little bit, or by increasing short-term funding, which are the routes that we will probably be using in the coming years. The way that we go about buybacks is that we typically buy back bonds that mature within the year, meaning the next 12 months. In 2020 we went a little bit further and already started addressing purchases for 2022. We stopped that because of the crisis, but this year as well, we started buying back the 2022 bonds already at the beginning of the year, so that we were already buying back bonds up to 18 months out rather than 12 months. That’s the kind of things we can look at from the perspective of trying to smooth out the redemption schedules.

Q: You have a large redemption bubble coming in 2028, but that’s too far ahead, correct?

A: That is still a long way away. We have the same kind of fluctuations in the coming years; in 2024 and 2026 we have bigger amounts than in the uneven years in-between. So it’s something that we will look at one step at a time.

Q: Do you see any changes in secondary market liquidity as a result of ECB QE?

A: Well, not so much. There are of course impacts if you look at the customer volumes. But then again, we should take into account that the volumes that we get reported as DMOs exclude the ECB purchases. If you add them back in, you can see that the volumes are more or less stable. We do see from year to year or from a couple of years to the next couple of years some waves in terms of where the main activity is, what kind of geographies are more active than others or what kind of customers are more active than others. But all in all, I would say that the market has remained fairly stable throughout these past couple of years, taking into account the volumes that the ECB has been purchasing.

Q: So you don’t see a need for a facility like the repo facility initiated in May by Italy to help manage Treasury liquidity and secondary market liquidity?

A: We have always paid great attention to the functioning of our secondary market. Therefore, we do have a number of facilities. I mentioned already the optional reverse inquiry facility, which is a purchase facility for the primary dealers. We also have a repo facility if for some reason the repo market is under more stress or certain bonds cannot be found. But I have to say that whereas in the first QE period in 2016 we did see quite a lot of use of that repo facility, for example, we don’t see that at all in the current market. So, it appears that the repo market is functioning well and that we don’t have any bonds that are becoming exceedingly special. And the fact that the banks can also purchase certain bonds that have become too expensive is also a big help that we’re offering to them and that makes them feel at ease in quoting all of our bonds, knowing that they can always ask us to sell them at an upcoming auction. So, we have those facilities in place, but we cannot say that there’s been increased use of them in the past year.

Q: No worries about a possible announcement of ECB tapering in December?

A: I think central banks are doing a good job of preparing markets for their moves, and if that comes up, the market will have anticipated it. Investors will also always be positioning themselves to buy bonds at whatever the market price is at the moment. That’s how the market should function and the ECB is preparing the market for whatever will come in the months ahead.