Transcript: Interview with Finland State Treasury’s Anu Sammallahti on 1 November 2024
5 November 2024
By Marta Vilar – MADRID (Econostream) – Following is the full transcript of the interview conducted by Econostream on 1 November 2024 with Anu Sammallahti, director of finance and acting Head of Division at Finland’s State Treasury:
Q: To what extent are your issuance decisions influenced by the current and expected level of yields and the shape of the curve?
A: Short answer: they are not influenced. First of all, our supervisory guidelines provided to us by the ministry of finance do not mention or recognise the level of rates or the shape of the curve as drivers for our funding operations. And usually, we follow a predictable and pre-communicated issuance pattern, like an auction calendar. In choosing the bonds to be auctioned we, of course, observe market demand, and that might then be affected by the level of rates or curve shape. But it’s an indirect channel. The exact timing for the syndications of course allows for some evaluation of market conditions, but the overall pattern would be less influenced.
Q: So, you don’t really follow a sort of opportunistic approach, right?
A: Right. Only to the extent that we would like to see market conditions that are favourable to issuance when choosing the exact timing for the syndications.
Q: If the European Central Bank cuts the policy rate to just under 2% in 2025, as markets currently anticipate, the timing and the pace of your issuance would then not be influenced.
A: Yes, exactly.
Q: Finland has not issued yet a green bond. What is the reasoning behind this decision?
A: Secondary market liquidity is a key concern. Given the fact that we are a small/medium-sized issuer in the euro space, our secondary market liquidity is not at the level where it is for some of the larger issuers. So, that's why we are wary of that. And we are concerned that perhaps issuing labelled products would drain liquidity from the nominal secondary market. So that I'm concerned about. Then a second thing is that we feel that the Finnish government, with explicit and quite ambitious climate targets which are enshrined in law, already shows a high level of commitment. Finland tops UN Sustainable Development Goals rankings and we haven't felt that there would be any imminent need for additional green signalling. Then, one also must remember that the purpose of the government budget is not project finance, in a welfare state like Finland. It consists more of income transfers. So, maybe philosophically, a labelled product that is wonderfully suited for project finance and a very good product as such is not perhaps the core of what a government does.
Q: Two years ago, when we interviewed your predecessor, Mr Koivisto, he told us that Finland still had to see more standardisation to issue a green bond. But it sounds like your underlying thinking has changed a bit anyway.
A: Things developed. We have seen more and more peer issuers venture into labelled products, but in my understanding, the European green bond standard is not yet complete. There are solutions to work around this while still adhering to the ICMA standards. I don't think you could argue that the standardisation is fully done because it still appears to be work in progress.
Q: So, you don't plan on issuing a green bond anytime soon.
A: There is no imminent plan, no.
Q: What would you need to see to feel sure that it is the right time to issue a green bond?
A: There are some factors related to labelled products as such on a more philosophical level. There could be several factors in play, for example the cost of funding vs. the nominal bonds. Because, arguably, setting up a labelled product line and the green framework and the follow-up reporting is of course not cost-free. So, it would be nice to see those costs covered by an equivalent reduction in the cost of funding. If there ever wasa specific need to flag green goals on a project level by the government, that could be a driver. Also, what I already mentioned: full clarity on green bond standards, secondary market liquidity issues… so it would need a number of things.
Q: Some market participants would feel that you are somehow lagging behind the rest of treasuries that I have already entered this market. Do you have this feeling?
A: Not as such. I do understand that different sovereigns may have different drivers. Specifically on government targets, I would feel on the contrary that Finland is on the forefront in articulating climate targets at the government level. The carbon neutrality target for 2035 is ambitious in comparison to some other governments.
Q: In your Q2 review you said that you were going to issue a new euro benchmark bond and that it was likely to have a maturity of 5-7 years, but if market conditions were to prove favourable, then you would go for a longer maturity, i.e.15 years. Finland finally issued a 5-year bond via syndication. Why did you choose the smallest tenor?
A: We were looking at our maturity structure of redemptions. We usually have two euro benchmark bond redemptions per year, in April and in September. We had an open maturity date on the 15th of April 2030. We wanted to use that. The question was when. And this seemed like a good opportunity for that because it was a slightly long 5- year bond. Had we left it for later it would have been shorter than five years, where we rarely syndicate. There seemed to be market evidence that five years could be a good point on the curve to attract demand, and fortunately that was also what happened.
Q: Was your decision to set the maturity of your syndicated transaction in August at the shorter end of the guidance informed by the lower level of yields in that sector or the relative strength of demand identified during price discovery?
A: It was driven by the open redemption window and the perception of demand in that segment.
Q: Do you fear that Finland could face a waning demand for your issuances next year amid falling interest rates?
A: That’s an interesting question, of course. One could also argue that if indeed we are entering an easing cycle with regards to central bank reference rates and we remain in that easing cycle, there would be potential for fixed income products and government bonds. So, I’m not concerned.
Q: Are you expecting higher demand on longer term bonds because of duration strategies?
A: That would be difficult to predict.
Q: Your strategic review says your borrowing needs will range from €40-45 billion until 2027. What are you expecting in this regard for 2025?
A: With the information thus far on next year’s central government budget and the redemptions, we are expecting a programme of around €43 billion next year.
Q: How are you planning to structure your issuance next year?
A: Pretty much along the same lines as this year, because the size is fairly similar. So, that would mean three euro benchmark syndications, supplemented by bond auctions, which will be subject to market conditions, and also - market conditions permitting - a benchmark US dollar issuance.
Q: So, is this any different versus this year’s issuance?
A: No. At the moment issuance would seem largely similar to that of this year.
Q: Only a few weeks ago, Fitch ratings revised the Finnish economy’s outlook to negative from stable. Are you concerned that your AA+ might be at risk?
A: As an issuer, I would not speculate on the credit rating.
Q: Fitch’s move was related to the country’s rising public debt, insufficient fiscal consolidation, uncertainty about further measures and expectations of a wider fiscal deficit this year. A few weeks ago the Bank of Finland said that the country's recovery from recession remained slow and difficult. What's your take on your economic performance?
A: We rely on the ministry of finance’s view on the economic outlook. They publish an update quarterly. In the latest review they believe the lowest point in the cycle has passed already or is about to be passed. They expect GDP growth to pick up again next year. Reading both those forecasts, I didn't see any major differences between the Bank of Finland’s forecast and the ministry of finance’s forecast.
Q: Fitch said it forecasts the government deficit rising to 3.7% of GDP in 2024, from 2.9% in 2023… and in terms of debt to GDP, this ratio has increased in 1.9% in the last 3 years while it has declined by more than 10% in the rest of the euro area. Do you think this trend can continue?
A: The current government certainly thinks it should not and they are implementing austerity measures, both expenditure cuts, tax hikes and structural labour market measures to curb the deficit increase during their term.
Q: In some other countries treasuries have attracted plenty of investors from the retail sector. Where are you in this regarding in Finland? Are you also targeting retail investors?
A: Not currently, and we have no imminent plans. Our historical experience with retail issuance, and I admit this is from a long time ago, was that it was not a very significant source of funding at the time. I believe it is a meaningful source of funding only for a limited number of governments in Europe. In other cases, I believe it is there more as a service to the public. There appears to be no imminent need in Finland.
Q: So, you are not planning on increasing issuance for the retail sector.
A: For the time being, no.
Q: Are you currently planning any kind of innovation within your issuance strategy?
A: No.
Q: Back to the credit outlook, last year your predecessor said that Finland's accession to NATO was going to send a strong message to financial markets. Do you think it has had an impact on this year’s issuance, or that it will have at some point?
A: I wouldn't say so. Joining NATO has naturally mitigated the geopolitical risk landscape for Finland, but I would expect this to have been priced in by the markets already. It has not affected the issuance.
Q: Let's talk about the spread between the Finnish 10-year bond and the German Bund, which has been quite steady through much of the summer period. How are you expecting it to move soon? Do you think interest rate cuts from the ECB will help to narrow the spread?
A: That is again a difficult call. It would depend on a number of factors. Of course, economic developments in both countries would probably be key drivers.
Q: Now that the ECB is expected in the context of its PEPP programme to stop all reinvestment by the end of 2024, do you think something would change for Finland?
A: I'm not expecting any major change, given what has already happened in the winding down of the PSPP program. I don't think we saw any major effects. Without any more profound information on the topic, I wouldn't expect that in this case either.
Q: Mario Draghi has called for an extension of EU debt, arguing that Europe will hardly be able to face the high repayment costs of eurobonds issued in the Covid era. Do you fear that if the EU were to tap the debt market again, this could have an impact for small or medium-sized issuers like Finland?
A: Of course, that cannot be excluded, but I would not be particularly concerned given that the EU is already an established issuer on the market and markets have digested that issuance along with issuance of member states as sovereigns. So, I would not be overly concerned.