Risky Facet of T-Notes
22 March, 2012
Risky Facet of T-Notes

T-notes were emitted by Georgian state to give a positive signal to investors on economic prospects of the country but some sector pundits find the emission to be a premature and risky transaction against the backdrop of Georgia’s unstable economic picture.



“The transaction was quite a success,” Nika Gilauri, Prime Minister of Georgia, said on March 7, 2012, the T-Bills’ auction day. ”GEL 10 million’s worth of securities were emitted while demand was three times higher and the interest rate was fixed at 12%.”

Actually demand equaled GEL 13 7. Million and only GEL 5 million worth T-notes [Treasury note] were sold at the first auction fixing 12% and 12.4% as minimal and maximal interest rates respectively. Ultimately the yield averaged to 12.3% that should be paid twice per year [once in six months]. Six commercial banks participated in the auction.

According to the Ministry of Finances (MOF), emission of such long-term T-notes bespeaks of investors’ trust toward the country’s economy and its national currency alike since they make long-term investments in the national currency denominated T-notes.

Up to date the state issued only short-term state securities that included one-year and less mature Treasury-bills [T-bills] fixing at around 7-8% of interest rate, as well as one to five years mature T-notes at around 8-11% of yield.

Prime Minister accentuated that the diminishing tendency of interest rates currently fixed for T-bills-and-notes bespeak of trust toward Georgian economy.

MOF assures that increase of sovereign rating of Georgia [Standard & Poor’s as well as Moody’s improved Georgia’s credit ratings by fall of 2011 and early this past winter respectively-GJ] created ground to such a long-term T-note emission.

“The fact that demand 2.74-fold exceeded supply is a very positive signal. Interest rate fixed as low as 12.4% also bespeaks of big market interest. We must suppose that the demand will increase together with the further economic growth and improvement of credit rate,” MOF elaborated with Georgian Journal.

But part of Georgian financial market analysts does not share optimism of authorities. They question the 10-year mature T-notes transaction as an irrelevant deal in the face of quite volatile prospects of Georgian economy in nearest future: turbulence of the global economy including Euro crisis, increasing threats of global economic recession, etc pose external shock threats on the one hand; on the other hand with two elections in store [the upcoming parliamentary elections scheduled this fall and the presidential one next year] that may disturb

macro-economic picture of the country, Georgia seems far from being settled to make optimistic prognosis 10 year ahead.

Ditrikh Muller, a financial market analyst with Georgian Investment Group, acknowledges that as a matter of fact the 10-year T-note emission is a token of state finances’ stability but with eminent EU crisis and elections on the threshold he does not see due stability around to initiate 10-year mature T-notes.

On the other hand, he finds the restricted access to state securities discriminating in the essence that baffles the real price-making process.  The point is state liabilities in Georgia are traded through auctions allowed to banks alone and never been available at secondary market. Other potential investors both legal and physical entities may purchase state securities only through banks thus making the price-making process non-transparent.

“One can only conjuncture who, banks or the state, enjoy profit in fact,” Muller said.

MOF assures that state securities are available to any willing person local or foreign resident through quite simple red-tape free registration procedures at banks, although did not disclose how the share of sold treasury bills and notes is redistributed among banks and other physical/legal entities. Uncertainty triggers speculations that banks take lion’s share if not the whole pie.

“Yes, other physical and legal entities can get T-Bills through banks but it takes extra costs through commissions paid to banks, on the other hand there is an interest conflict: if a bank finds a transaction profitable it can forestall the requested securities itself and refuse to a client ultimately that means a restricted access to the state obligations and dubious market-price,” Muller argues.

Levan Surguladze, managing director of CFS [Caucasus Financial Services] Investment Bank, agrees that trading only in the circle of banks narrows the money market price and unrestricted access to T-Bills might lead to real money price in the country but he estimates the underway 10-year mature T-notes emission as a positive signal creating a new benchmark for effective evaluation of money price and boosting the financial market.

“The longer is the maturity the more effective is the price benchmark fixed at around 12% at the moment for it means more stable profit in longer period and companies make more effective calculations when concluding financial transaction between them,” he said.

Of restricted access to state securities he thinks the reason is the state finds risky attraction of direct investments from other Georgian personal and legal investors.

“To attract foreign investors Georgia issued its sovereign Eurobonds, but attraction of local investments from ordinary citizens seems not a priority to the state at the moment,” Surguladze said.

Lia Eliava, an economic analyst, believes narrowing the access to [state securities]  banks means the state finds it easier to control banks rather than other investors in case of failure.

“If other investors acquire T-Bills especially foreigners it is riskier for you cannot make them be silent like banks, state has better control on bank everywhere not in Georgia alone,” Eliava said.

She finds the 10-year mature T-notes very risky to banks for she cannot see any economic factor leading to long-term optimistic prognosis in Georgia.

“The state budget of developing countries are less trustful, in 2011 our economic growth reduced and economic activity got sluggish accordingly [compared to pre-crisis figures], another crisis looms in prospect to developing countries by end of 2012 and what will happen after 10 years is very hard to forecast and this T-notes are very risky to banks,” Eliava said.

According to her, the questioned long-term T-note emission very likely is a source to fulfill the budgetary deficit rather than an impetus to financial market.

“Banks have been a source to finance budgetary deficit through T-bills and short-term T-notes paid off in few months or in a year or two but 10-year long T-notes mean that the money [paid in the state budget] will be lost for 10 years to banks and the only profit they can get meantime is the 12% yield paid twice per year, not too lucrative a rate by the way,” Eliava elaborates and reminds that Russian crisis in 2004 started from T-notes transaction with banks when the state refused to pay-back.

She believes the much touted swoop on T-notes was a governmental order to banks rather than a voluntary action.


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