TRANSCRIPT: Interview with Finland State Treasury’s Teppo Koivisto on 02 February 2022

7 February 2022

By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on February 2 with Teppo Koivisto, director of the Finance Division of Finland’s State Treasury and thus responsible for Finnish public debt management:

Q: You were “not too concerned” about NGEU issuance when we last spoke, which was shortly before NGEU issuance started. How has it gone?

A: My impression is that it has gone quite well with the NGEU. Of course, there is a new large issuer in the market, but for a small issuer like Finland, I think we’ve been able to navigate through our funding plans well, so in that sense, no concerns related to the NGEU have materialised. They have also communicated their strategy and operations well in advance, and that has been very helpful.

Q: Fellow Scandinavian country Denmark has now issued its first green bond. What effect does this have on your thinking about green issuance? You said last time that “we will probably come back to the green bond discussion in the coming years, but it’s not on our table at the moment.”

A: Of course, we decide on our funding plans based on our own premises, though we follow the green market very keenly. But at the moment, we do not have any imminent plans here at the DMO to issue green bonds. What we’d like to see is more standardisation in the sustainable bond market overall. That would be very helpful and welcomed. Because it seems that for now, it’s a quite mixed bag, with a variety of different products in the market. But instead of green bond issuance, we have emphasised our ESG characteristics to our investor base, and we have obvious reasons for that, because for the first time, in 2021 Finland was ranked number one in an international comparison of sustainable development. And this comparison provided by the United Nations assesses the countries’ progress in implementing the 2030 Agenda for Sustainable Development and its SDG goals. So, our emphasis has been more on promoting the national and global commitment of the Finnish government to tackle climate change and to support environmental, social development and governance initiatives.

Q: You issued a new 20-year benchmark last week; how do you feel that went?

A: It went very well. We took €3 billion from the market and the book was €16 billion overall. I think it was a very ordinary transaction, despite the fact that there was a bit more volatility in the market, especially on the equities side. But we found a narrow but steady window, so the execution was very smooth. We printed at mid-swap minus five, and according to our fair value calculation we offered some two basis point new issue premium to the investors in this transaction. So, it was a very typically Finnish efficient transaction.

The timing was probably a week or two earlier than usual, and one of the drivers for this was the upcoming NGEU issuance. And then we didn’t have any reasons to postpone the transaction when we saw a good opportunity to go to the market. We are going to introduce three new euro benchmark bonds this year via syndication, and the tradition is that we issue two of them in the first half, so the second one will be introduced in the second quarter before the summer break, market conditions permitting, of course. And the third transaction will be left to the latter half of the year.

Q: What can you say today about the possible characteristics of the remaining two transactions?

A: We try to replicate ourselves year after year. It’s a tradition that the first issue is the longest one, so we’re obviously looking at the 10-year segment for the second transaction and then the last one would be slightly shorter, so a maturity somewhere between 5 and 7 years. That will be our base plan.

Q: You’ve had a number of syndicated SSA deals in January. Are there any general conclusions as to how they have gone?

A: Not really. All the transactions have gone quite well so far, despite the volatility due to inflation concerns and equity volatility. The thing I’d like to mention is that investors are a little bit more cautious with regard to duration in this environment, given uncertainty about inflation and long-term yields going forward.

Q: How much uncertainty, given the pandemic and geopolitical tensions but also the possibility of stronger-than-expected growth, do you think the financing programme is subject to for the rest of the year?

A: With the knowledge we have today, I don’t believe that these factors will cause any substantial fluctuations in our financing programme in 2022.

Q: If anything did unexpectedly increase your financing needs, what would be your instruments of choice to deal with this?

A: This is a very broad question, whereas funding decisions depend on the precise scenario. For example, two years ago, in the first phase of the corona crisis in Spring 2020, we and most of the European Union member countries increased our cash buffers with T-bill issuance. And then in the second phase, when the worst of the uncertainty had faded, we were in a position to either term out the increased short-term debt or redeem it. So that was the reaction then.

Q: Is the presence of an increasingly aggressive Russia threatening war right next door having any impact on appetite for Finnish sovereign debt?

A: All I can say on this subject is that when we did the latest transaction last week, it was a very ordinary transaction in terms of issue premium and investor demand.

Q: How do you regard the most recent decisions by the ECB with respect to asset purchases, and the likelihood that tighter monetary policy and in particular an end of net asset purchases under the PEPP are looming?

A: I would not be too concerned. In all our thinking, we have always emphasised the fact that the central bank bond support will cease someday, sooner or later. So, from our perspective, tapering is just a gradual shift back to normal market conditions and normal investor behaviour. Because of that, we have never taken our investor base for granted. On the contrary, even during QE, we have continued very active investor dialogue to ensure that our debt will be sufficiently diversified by investor type and geography and by maturity.

Q: What about concerns about volatility and spreads?

A: As a frequent government borrower, we have to fulfil central government funding needs every year in any event. We have geared our processes to this.

Q: What do you see as the long-term challenges for Finnish public finances, and how are you meeting them?

A: There are two well-known structural problems worth mentioning: the rapidly ageing working-age population and sluggish productivity growth. Increasing employment is a key government policy to improve medium-term potential growth and ensure the sustainability of our public finances. The government has already set an agenda to lift the employment rate to 75% by 2025. They have also introduced some measures to raise the number of employees by the end of the decade. But there is still some work to be done on these efforts to improve labour productivity. In December 2021, the employment rate stood at 73.3%. The other topic is the fiscal pressure from an ageing population, and the main challenge for public finances in the medium to long term is an ageing and shrinking working-age population, which creates additional fiscal costs. We have positive news in this area, because Parliament last June approved the plan to transfer the responsibility for organising health, social and emergency services to larger, newly established wellbeing service regions. The rationale for this reform is to generate savings in the medium term based on economies of scale and the incentives for more efficient service provision.

Q: Are you currently considering any particular innovation for your issuance?

A: No. Boring’s good. We concentrate our long-term issuance in euro-denominated benchmark bonds to provide as much liquidity as possible into the euro government market. Short-term issuance is done with T-bills, mostly in euros but also in dollars. And then of course we prefer to issue a dollar benchmark on an annual basis, but dollar issuance is always subject to cost efficiency.