Latvia to test bond waters

RIGA - At the beginning of June, a meeting with potential European and, possibly, U.S. investors is scheduled to assess their interest in Latvia’s bonds on the international financial markets, said State Treasurer Kaspars Abolins, reports news agency LETA. Within the framework of the meeting, the European and U.S. investors will be informed about the economic situation in Latvia, and their interest in Latvia’s bonds will be assessed.

If the investors are interested, a 500 million dollar value transaction may follow. The bonds must be liquid enough and their amount sufficient. 500 million dollars is the minimum amount to ensure liquidity, explained Abolins.
“If Latvia returns to the international financial markets this year, the bonds will [continue to] be issued also during the next few years. It is strategically important to diversify the investors so that not all bonds are issued only in the United States and in U.S. dollars. Therefore it is possible that the bonds will be issued in Europe as well. We also plan to talk to Asian investors, because the amount that must be re-financed in 2014 and 2015 is significant, and the diversification of investors will ensure that it is refinanced,” said Abolins.

The state treasurer pointed out that the potential investors will most likely be investment and pension funds, and reassured that the country would be able to refinance its debt with the help of the bond issue.
Latvia’s plan to sell its first Eurobonds since 2008, however, may increase the cost of insuring the country’s debt against default relative to neighboring Lithuania, say analysts at UniCredit, reports Bloomberg. Latvian and Lithuanian five-year credit-default swaps, which investors use to protect against non-payment or to speculate on a borrower’s credit worthiness, closed at about 198 basis points (1.98 percent) on May 20, according to CMA prices. Latvian CDS costs were 265 basis points higher than Lithuania’s in October 2009.

Latvia’s decision to sell bonds “could see the CDS market once again differentiate between Latvia and Lithuania,” said Gillian Edgeworth and Dmitry Veselov, London-based analysts for UniCredit, in a report published on May 23. Lithuania returned to international markets in June 2009, when it sold 500 million euros of bonds.
Latvia, which turned to a group led by the European Commission and the International Monetary Fund for a 7.5 billion euro bailout package in 2008, may sell as much as 1.5 billion euros of bonds this year, Finance Minister Andris Vilks has said. The final review of Latvia’s current stand-by agreement is scheduled for November. The government may at that time seek a new precautionary agreement to provide a safety net for public finances, Edgeworth and Veselov said in the note.
“In the base case, this will not involve disbursement of additional financing, but instead an increased reliance on market financing,” they said.

Plans by Latvia and Lithuania to follow Estonia into the euro zone in 2014 may face opposition from some members of the currency union because of the sovereign debt crisis in the region, the analysts said. “There is little doubt but the current EMU crisis has increased opposition among EMU members to enlargement,” the two said.
“Indeed, it is not clear that Estonia would have gained entry if it had pushed for assessment this May rather than last,” they added. “Should Latvia and Lithuania hope to achieve this at any point in the next 3-4 years, continued fiscal consolidation and maintenance of a manageable current-account deficit is essential,” according to UniCredit.

CDS prices typically fall as investor confidence improves, and rise as it deteriorates. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals 1,000 dollars annually on a contract protecting 10 million dollars of debt.