The GKO Game:
Supplement
(For Giddy's International Financial Management course)
LEVEL 1 - 1 OF 112 STORIES
Copyright 1996 American Banker-Bond Buyer a division
of Thomson Publishing Corporation
Emerging Markets Debt Report
January 29, 1996
SECTION: Vol. 9; No. 4; Pg. 3
LENGTH: 1154 words
HEADLINE: Russian GKO Scheme May End Stellar Yields
BODY:
Russian GKO yields are likely to drop sharply under a forthcoming Russian
Treasury scheme to attract greater foreign investment into heavily restricted
local bond markets, Russian market participants predict.
That would dampen the main attraction of Russian ruble Treasury bonds:
stratospheric yields of up to 300% during the past year, according to the tales
of those who deal with them.
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Emerging Markets Debt Report, January 29, 1996
Under the plan, yields could plunge into the low double digits, some predict
perhaps to around 12% to 14%. Though inflation is projected to drop, especially
if Russia secures its IMF program, just keeping up with inflation would then
be a large gamble.
Seeking to draw in foreign cash to help finance a 4% budget deficit, the
government plans to begin a pilot project by the end of this month aimed at
allowing more foreign investors into GKOs, according to Central Bank deputy
chairman Andrei Kozlov.
But in Moscow, Kozlov's announcement of the project was regarded as a trial
balloon a sounding out of investors rather than any concrete plan for changes in
a lucrative $4 billion market controlled by Russian banks.
"Our sense here is that there is not a concrete plan," says Peter Lazaro,
managing director of AIOC Capital, which specializes in Russian investments.
And after the ouster of deputy prime minister for the economy Anotoly
Chubais, and the apparent choice of a replacement, Vladimir Kadannikov, whose
record has been not been especially free market oriented, such plans could be
relegated to a back drawer.
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Emerging Markets Debt Report, January 29, 1996
In any case, the jury is still out on whether an expanded system of GKO
investment will be any more attractive to foreign investors than the current
one, which limits foreigners to 10% of total outstanding issuance and requires
profits to be held in Russia for a minimum of one year before repatriation.
The likelihood of eventual wider participation but lower yields may
disappoint those pioneers who came in strictly for yield. The New Rules
For the first one to three months of the new system, according to Kozlov's
outline, foreigners would be allowed to buy GKOs at auction, but will be
prevented from trading them. The bonds must be held to maturity. That
restriction itself would limit yields, which have already tumbled from the
triple digits in 1995 to the 65% to 75% level now.
The bonds are likely to be sold through Moscow Narodny Bank.
The Russian government is eager to lengthen tenors, so speculation is that
six months will be the minimum, although there's some possibility of 90 day
bonds.
Kozlov says the Central Bank and a foreign intermediary bank would offer a
guaranteed currency hedge and a guaranteed yield that would produce returns in
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Emerging Markets Debt Report, January 29, 1996
line with yields in the Eurobond market. That idea makes little sense at
present, since the sovereign has no Eurobond yet (and isn't likely to have one
until after the $32.5 billion commercial loan rescheduling deal closes).
Moscow based players are looking for pricing guidance to December and January
three month tranches of a $100 million Eurobond program begun by the commercial
Rossisky Kredit Bank. That deal, managed by Banque Indosuez, is producing yields
in the 12% area. However, at least parts of the issue were 100% collateralized
by MinFins.
There's no indication that the doors to the GKO market will be thrown open
wide to foreign investors, especially in the current anti Western political
climate. Kozlov says that Russian officials would "negotiate" with foreign
investors over GKO purchase terms, and "select" the ones that will be allowed
to participate in the market.
That sounds like more of a bid to secure foreign capital from a few hand
picked entities on Russian dictated terms than an open market for all comers.
Most foreign investors already in the highly volatile GKO market have come
more to gamble for the highest of yields than as a result of any newfound trust
in Russian officialdom's handing of its economy or markets, players in Moscow
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Emerging Markets Debt Report, January 29, 1996
say. They may initially resist a system intended to push down rates.
"Investors don't trust Russia. They think it's full of Communists," says a
frank Moscow based money manager. Rather, his clients looking for quick cash.
Stories of 100%, 200% even 300% yields from GKO volatility are not
uncommon. But the highest triple digit ruble yields seen in December have
already tumbled, to the 60% to 75% level. That's barely ahead of inflation, now
running at roughly 60%. Eager for Foreign Flows
The country wants to tap into lucrative foreign flows to help fund its budget
deficit, but, casting fearful glance over its shoulder at the Mexican Tesobono
debacle last year, is looking for ways to avoid a deluge of uncontrollable hot
money that could evaporate in the event of unfavorable political or economic
developments.
Thus, Kozlov stresses that the government was seeking to attract only "tens
of millions of dollars" from foreign investors, and that "billions" of dollars
probably would not be needed until this summer.
Russia's challenge is to attract the appropriate amount of funding drafting
rules neither too onerous to make investors turn away in disgust nor too
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Emerging Markets Debt Report, January 29, 1996
attractive to draw a herd. Mary D'Ambrosio
LANGUAGE: ENGLISH
LOAD-DATE: January 29, 1996
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LEVEL 1 - 6 OF 112 STORIES
Copyright 1996 Reuters, Limited
January 22, 1996, Monday, BC cycle
SECTION: Money Report. Bonds Capital Market.
LENGTH: 246 words
HEADLINE: MOVES ON RUSSIAN T-BILLS TEMPT FOREIGNERS, A BIT
DATELINE: LONDON, JAN 22
BODY:
Plans to make Russia's treasury bills ( GKOs) , which some say is the great
emerging market waiting to happen, more accessible to foreigners is unlikely to
go as far as they want, traders and analysts said on Monday.
A senior central bank official said in Moscow that the government would allow
foreigners to trade in the bills but restrictions would remain, including a
possible limit on yields.
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Reuters, January 22, 1996
"It's a good sign they plan to do it but with Russia you always have to see
the actual event...Words don't buy you a T-bill. But this is definitely
hopeful," a local fixed income trader with one European bank said.
She said that the ceiling on yields, which Russia plans to impose on
non-resaident investors, would reduce the attraction of the bills.
Foreigners have been effectively kept out of the market which many analysts
have pointed to as potentially one of the most attractive local currency markets
in any emerging economy.
The central bank will also force non-resident investors to buy roubles only
through designated foreign banks.
"Most important is the repatriation of profits. Until they
solve that problem they havn't dealt with the problem," David
Boren, emerging markets research analayst at Salomon Brothers,
said.
He noted other ways of getting into the market through
synthetic instruments could be more interesting until the GKO
maket is fully opened.
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Reuters, January 22, 1996
-- Jonathan Thatcher, London Newsroom +44 171 542 7770
LANGUAGE: ENGLISH
LOAD-DATE: January 23, 1996
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Copyright 1995 Reuters Limited
The Reuter European Business Report
December 19, 1995, Tuesday, BC cycle
LENGTH: 570 words
HEADLINE: LOCAL CURRENCY DEBT STARTS TO EMERGE
BYLINE: By Jonathan Thatcher
DATELINE: LONDON, Dec 19
BODY:
The allure of local fixed income
markets is brightening and several analysts are picking Russia
as the best of the bunch, if only Moscow would make it easier
for foreign investors.
"Local currency (fixed income) is becoming a separate asset
class," Standard Bank emerging markets investment strategist
David Atkinson said.
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The Reuter European Business Report, December 19, 1995
A number of banks in London have been adding or expanding
trading operations in the local fixed income market.
Markets from Eastern Europe to South Africa offer high
yields, often with limited currency risk, that can hold their
own against Brady bonds, analysts said.
"We are very bullish about GKOs (Russian treasury bills)...
They're high reward, medium risk," said Krassimir Katev, local
currency fixed income trader at Paribas for East and South
Europe.
"The consensus is that it's the most attractive fixed income
market in the world. I'm very, very optimistic," he said, adding
that his second choice for 1996 would be the dollar-demoninated
Russian Finance Ministry bonds.
Others were more wary because of the barriers to getting out
of the market legally but none doubted the enormous potential.
"The minute they lift the rules on repatriation you'll see
loads of people going in," one local fixed income trader said.
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The Reuter European Business Report, December 19, 1995
Katev suggested investments in Russia of up to six months,
maturing just before the presidential election.
The rest of East Europe is a mixed bag ranging from the very
conservative Czech instruments to the more speculative such as
Bulgaria or Lithuania.
"The interesting markets will certainly be Poland, Hungary
and Czech," Philip Poole, head of fixed-income and equity
research for East Europe at ING Barings, said.
The currency risk in Poland is very much in favour of
foreign investors, he said.
Czech paper may be a bit dull but it looks very secure.
"It's a good place to dip your toes into Eastern Europe,"
Poole said, adding that he doubted the crown's currency band
would be widened in the first half of next year.
However, David Lubin, emerging markets research analyst at
HSBC Markets, said it could fall from favour next year because
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The Reuter European Business Report, December 19, 1995
of a large current account deficit with the underlying problem
of fast wage rises and not much increase in productivity.
"I'd still buy local six-month paper but towards later next
year I wonder if people will begin to worry about the economy's
performance."
Hungary and Bulgaria are on analysts' watch list though
Hungary has limits on foreign participation in the primary
market and there is a risk of devluation.
The draw for Bulgaria would be a deal with the International
Monetary Fund, which it is now negotiating.
Elsewhere, Turkey's economic and political problems are
making it less attractive but for the short-term South Africa's
sophisticated domestic market should continue to attract foreign
investors as long as the rand is stable, they said.
One cloud hanging over the market is the chance that some
countries, frightened by Mexico's experience a year ago when a
botched devaluation sparked massive capital flight, may follow
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The Reuter European Business Report, December 19, 1995
the example of more successful Chile which makes it hard for
investors to skip in and out of the market.
But the future remains a bright one, they said.
"Now is a good time to get into the market," said Poole.
"Rates will probably drop in Hungary and Poland, so investors
should look at longer-term maturities."
LANGUAGE: ENGLISH
LOAD-DATE: December 20, 1995
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LEVEL 1 - 24 OF 112 STORIES
Copyright 1995 Reuters, Limited
December 14, 1995, Thursday, BC cycle
SECTION: Money Report. Bonds Capital Market.
LENGTH: 122 words
HEADLINE: RUSSIA STILL WON'T LET FOREIGNERS TRADE T-BILLS
DATELINE: MOSCOW, DEC 14
BODY:
The Russian authorities have still not decided whether to allow non-residents
to trade Russian Treasury bills ( GKOs) despite their intention to do so, new
Central Bank Chairman Sergei Dubinin said.
"For the time being we are refraining from taking the final decision about
admitting non-residents to the GKO market... This question has often been
discussed, even before I arrived at the bank, but so far we have not taken a
final decision," he told a parliamentary banking committee.
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Reuters, December 14, 1995
The bank's deputy chairman, Andrei Kozlov, said in September that the central
bank was proposing to remove rules which effectively discourage foreigners from
trading Treasury bills by the end of the year.
--Moscow Newsroom, +7095 941 8520
LANGUAGE: ENGLISH
LOAD-DATE: December 15, 1995
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LEVEL 1 - 28 OF 112 STORIES
Copyright 1995 Reuters, Limited
The Reuter Business Report
December 5, 1995, Tuesday, BC cycle
LENGTH: 481 words
HEADLINE: St. Petersburg targets foreigners with ruble bond
BYLINE: By David Chance
DATELINE: LONDON
BODY:
St. Petersburg is to embrace foreign capital with the country's first
municipal bond available to overseas investors since before Russia's 1917
revolution, Mayor Anatoly Sobchak said Tuesday.
Sobchak said that in an effort to plug its $ 100 million budget deficit and
fund development, the city would issue $ 500 million in bonds in 1996, some of
which would have a maturity of more than a year and so are eligible for foreign
investors.
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LEVEL 1 - 33 OF 112 STORIES
Copyright 1995 Reuters, Limited
November 27, 1995, Monday, BC cycle
SECTION: Bonds Capital Market.
LENGTH: 345 words
HEADLINE: E.EUROPE DOMINATES LONDON'S LACKLUSTRE BRADY TRADE
DATELINE: LONDON, NOV 27
BODY:
Eastern European debt dominated London trading, with Polish Brady prices
slipping while Russian MinFins edged up, dealers said.
"There are no big movements (in Polish debt prices), but there is some
uncertainty following Kwasniewski's victory and Walesa's challenge," said one
trader here.
Polish Par bonds lost 3/8 in early activity, slipping to
43-5/8, while Discs shed 1/4 to 75-3/8.
.
Reuters, November 27, 1995
Defeated Polish President Lech Walesa has accused Aleksander Kwasniewski of
winning last week's presidential election under false pretences.
Walesa's supporters have called for the election to be annulled and Poland's
Supreme Court has until December 9 to rule on the poll's validity.
The uncertainty appeared to be the main factor weighing on prices, traders
said.
Russian MinFins also saw some movement in a quiet London morning.
Tranches 2 and 3 , with greater appeal to domestic
investors, showed the biggest slippage, losing 3/4 to 93-3/8 and 7/8 to 57-00
respectively.
Tranche 4 , normally favoured by foreign investors, was unchanged,
as were Russian Vnesh loans.
Mark-denominated Vneshs were steady at 33-7/8 while their
dollar counterparts were flat at 31.
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LEVEL 1 - 40 OF 112 STORIES
Copyright 1995 The Economist Newspaper Ltd.
The Economist
November 4, 1995, U.S. Edition
SECTION: Business, Finance and Science; FINANCE AND ECONOMICS; Pg. 76
LENGTH: 566 words
HEADLINE: Lucky losers?
BODY:
MOSCOW
THE memory of Mexico, and the fear of having too much flighty hot money
washing in and out of the rouble, has provided Russia's finance ministry with
one of its main arguments for shutting foreign investors out of the
three-year-old market for Russian treasury bills (known as " GKOs" ). The
central bank has been advancing a further rationale: that hundreds of shaky
Russian banks are being kept afloat by the high yields on GKOs, which would
fall sharply if foreigners piled into the market.
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The Economist, November 4, 1995
For foreign fund-managers, the reasons have mattered less than the results.
They have been obliged to stand seething on the sidelines while GKOs have
proved to be one of the most lucrative fixed-interest bets (in dollar terms) in
the world this year. If there is a consolation, it lies in the thought that the
returns on GKOs have been simply too good to last. Something will have to
give, and soon.
According to AIOC Capital, a Moscow securities house, GKOs bought on May
15th and sold a month later would have produced an eye-boggling annu-alised
dollar return of 170%; in subsequent months, the returns would have ranged from
50% to 110%. Why such a bonanza?
The reason is an improbable collision of two forces. Russian inflation,
though falling, has remained sky-high by international standards: the monthly
rate has declined from 7.9% to 4.5% since May, still enough for nominal
annu-ali-sed yields on rouble paper to be running close to 100%. And yet,
against most expectations, the government has succeeded in stabilising the
rouble exchange rate within a published band of 4,300-4,900 roubles to the
dollar. The result has been a windfall for anyone holding rouble paper but
keeping his books in dollars.
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The Economist, November 4, 1995
Few have had that good fortune. Foreign investors have been shut out of the
GKO market by exchange controls allowing the repatriation of capital only from
investments held for more than a year. (They have also been barred from buying
more than 10% of any one issue, but that ceiling has yet to be tested). Some
private investors have used Russian front-men to beat the rules, or have bought
derivative products. But the larger foreign institutions, not wanting to offend
the central bank, have held off and hoped for the rules to change.
They may have to go on hoping. The cap on foreign holdings may rise to 20%,
but the finance ministry seems as reluctant as ever to allow the repatriation of
short-term profits. It hates the thought of paying huge amounts of interest to
foreigners--while the central bank worries that foreigners would drive yields
down.
The central bank's logic seems equally weak. Even if all of Russia's banks
were worth saving--and the 300 wobbli-est have only 1% of the system's
deposits--ring-fencing the GKO market has been a dangerously inefficient means
to that end. The effect is to raise the cost of financing the government's
budget deficit, and to drive up other borrowers' costs.
In any event, the strong rouble, the key to the market's attraction to
foreigners, may not last for ever. There is growing talk of a "crawling peg"
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The Economist, November 4, 1995
to accommodate inflation; and President Yeltsin's illness is provoking more
general worries about future policy. A time may yet come when foreigners find
their exclusion from the GKO market a blessing in disguise.
LANGUAGE: ENGLISH
LOAD-DATE: November 7, 1995
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Copyright 1995 Independent Press
The Moscow Times
October 31, 1995
SECTION: No. 830
LENGTH: 1027 words
HEADLINE: Overseas Investors Refocus on T-Bills
BYLINE: By Natasha Mileusnic
BODY:
Postreform Russia has seen foreign investors hone in on the country's
massively undervalued enterprises, with a few dozen of these blue chips now
engaged in fairly active and steady trade. But investors say a new trend is
emerging in Russia's capital markets, focusing attention for the first time
away from equities and onto oft -overlooked fixed-income instruments. Of these,
state treasury bills are the most popular, while some choose to trade in
longer-term Russian debt issues.
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The Moscow Times, October 31, 1995
With yields as high as 100 percent annually and the ruble firmly within the
band set for it in July, brokers and investors say T-bills also known by their
Russian acronym, GKOs offer one of the best buys on the market, or higher
returns and lower risks than the volatile stock market.
"The change is dramatic," said Gleb Shestakov, president of Global Fund
Management. "A year ago definitely the response was quite negative and everyone
was fascinated with equities. People were not interested in fixed income."
Still, Shestakov put the size of T-bill trade at just 0.1 percent of the entire
securities market, while another broker said dealings in all forms of internal
debt now amount to just 2 percent of total portfolio investment, with most money
remaining in equities.
Pavel Teplukhin, chief of the Moscow office of the Center for Economic
Performance of the London School of Economics, said Western money has yet to
play a "significant" role in the T-bill market, noting that foreign
participation has never once reached the 10 percent limit on a given primary
auction imposed by the Central Bank.
Government officials have said for months that they are considering raising
the limit to 20 percent, and may relax restrictions on repatriating profits from
short-term securities.
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The Moscow Times, October 31, 1995
The overall growing interest reflects both increased confidence in the
Russian reform process and the government's greater reliance on debt financing,
traders say.
"There is a need for a new alternative source of capital investment in
Russia, and the obvious sources is fixed income, from the issuance of new
debt, both government and corporate," Dan McGovern, an emerging markets analyst
at Merrill Lynch, said at an international conference on Russian securities in
Moscow this month.
An entire day at the conference was devoted to investing in fixed income. A
number of foreign investors expressed interest in learning how to tap the T
-bill market, restrictions on which could be preventing their explosion as the
top Russian investment option.
A key draw of T-bills is their high yields. Average annualized yields on the
popular three-month notes have been falling, but on average more slowly than
inflation, and the last primary issue yielded more than 100 percent.
As well as providing healthy returns, T-bills especially if hedged with
dollar futures offer a less risky investment than the stock market, in which
investors have cited unclear shareholder rights as a primary concern.
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The Moscow Times, October 31, 1995
The liquidity of the market is also attractive to nonresidents, with trades
clearing in one day, rather than the five to 10 days often associated with share
settlements.
"It's a rather unique market tool since it combines high yields and one-day
liquidity," said one Guta-Invest official, who declined to be identified.
Foreign investors also dominate trade in MinFin bonds, the other primary
internal debt instrument in Russia. Five tranches of MinFins which comprise
the debts of the Vneshekonombank to domestic borrowers were issued in 1991, the
first of which has already been redeemed.
The size of the market is more than $7 billion, up to a third of which is
Western investment, said Shestakov.
"Definitely the consensus is that most of the trading and liquidity in the
market is Western investors," he said.
LANGUAGE: ENGLISH
LOAD-DATE: November 2, 1995
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LEVEL 1 - 58 OF 112 STORIES
Copyright 1995 The Financial Times Limited;
Financial Times
September 8, 1995, Friday
SECTION: Pg. 3
LENGTH: 461 words
HEADLINE: Russia may ease access to debt markets
BYLINE: By JOHN THORNHILL and CHRYSTIA FREELAND
DATELINE: MOSCOW
BODY:
Russia may soon allow foreign investors greater access to its debt markets
as the government seeks additional sources of capital to fund its pressing
financial needs. The move would mark a significant step in Russia's attempts
to liberalise its infant capital markets.
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Financial Times, September 8, 1995
Mr Andrei Kozlov, a deputy chairman of the Central Bank, yesterday said he
had recently held talks with foreign investment banks in London, Frankfurt and
Paris to encourage them to begin trading Russian Treasury-bills.
'If we allow the foreign dealers to participate in the market I think that
the total limit for foreign investors will soon rise to 20 per cent - 10 per
cent through domestic dealers and 10 per cent through foreign dealers,' he said.
At present, foreign investors are limited to buying 10 per cent of any
Treasury-bill issue - although market participants suggest some foreign buyers
make additional purchases through Russian nominees. The limits are designed to
discourage large flows of speculative capital which could destabilise the
country's currency.
The high yields available on Russian government debt are likely to attract
considerable interest among foreign investors despite the currency risks.
A research report from Barings Securities, the London-based stockbrokers,
recently described the possible returns as 'enticing'. 'A Treasury bill maturing
in December yields an annualised 170 per cent in rouble terms. Investors can
obtain at least a 25 per cent return in hard currency terms (100 per cent
annualised) over the next three months if the rouble stays within the corridor
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Financial Times, September 8, 1995
which the Central Bank says it intends to maintain,' the report says.
Economists argue that the creation of an effective Treasury-bill ( GKO)
market has been one of the most impressive achievements of Russian reform,
allowing the government to cover its budget deficit by non-inflationary means.
Daily turnover has risen to about Rbs2,000bn (Dollars 450m).
Mr Kozlov said the Central Bank hoped to establish greater domestic demand
by opening new trading centres for GKOs in regional cities by the end of the
year. These would include Novosibirsk, St Petersburg, Vladivostok,
Rostov-on-Don, and Ekaterinburg.
But some Russian financiers fear the GKO market may be weakened by the
government's acceptance of a plan from a consortium of banks to loan it money in
return for holding in trust the state's shareholdings in several leading
companies.
Mr Mikhail Khodorkovsky, president of Menatep Bank, one of Russia's most
powerful financial concerns, said: 'We warned the government that this scheme
will suck money out of the GKO market. If we invest in the government's new
scheme we will do it with money we take away from the Treasury-bill market.'
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