Trading the Risk Financialisation Loyalty and
Emerging Market Government Policy Autonomy
Iain Hardie
University of Edinburgh
lsquoFor years now Lebanon has been able to sustain a
government debt-to-GDP ratio which is well beyond levels
deemed sustainablersquo (IMF 2006)
Debt-to-GDP RatiosSelected Countries (2005)
bull Japan 1760bull Lebanon 1746bull Greece 1075bull Italy 1064bull United States 699bull Brazil 673bull Turkey 580bull China 125bull Estonia 48
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
bull lsquoEventually the debt would have to be repaid For a politician however eventually is a long time certainly farther in the future than the next electionrsquo (Frieden 2006 381)
Who Governments Borrow From Matters
bull lsquoWhy does anyone want to buy [the bonds of] a government which is allocatinghellipall its revenues on interest paymentsItrsquos a Ponzi schemersquo (Fund manager London interviewed 18 October 2005)
bull Need to understand the sources of government financing Who Buys Bonds
Governments Want to Borrow Without Conditionality
bull Bond Borrowing Does Not Impose Direct Conditionality (as IMF)
Butbull lsquoIn the sovereign debt market national
governments borrow funds in order to compensate for revenue shortfalls or to fulfil other economic management objectiveshellipthose interest rates represent the governmentrsquos financing costs When market participants punish governments they do so by increasing the interest rates at which they will purchase government securitiesrsquo (Mosley 2003)
lsquoI used to think if there was reincarnation I wanted to come back as the President or the Pope or a 400 baseball hitter But now I want to come back as the bond market You can intimidate everyonersquo (James Carville Bill Clinton campaign strategist)
The Issues
bull How much can governments borrow sustainably
bull To what extent do governments in order to borrow have to follow the policy preferences of bond market investors
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
lsquoFor years now Lebanon has been able to sustain a
government debt-to-GDP ratio which is well beyond levels
deemed sustainablersquo (IMF 2006)
Debt-to-GDP RatiosSelected Countries (2005)
bull Japan 1760bull Lebanon 1746bull Greece 1075bull Italy 1064bull United States 699bull Brazil 673bull Turkey 580bull China 125bull Estonia 48
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
bull lsquoEventually the debt would have to be repaid For a politician however eventually is a long time certainly farther in the future than the next electionrsquo (Frieden 2006 381)
Who Governments Borrow From Matters
bull lsquoWhy does anyone want to buy [the bonds of] a government which is allocatinghellipall its revenues on interest paymentsItrsquos a Ponzi schemersquo (Fund manager London interviewed 18 October 2005)
bull Need to understand the sources of government financing Who Buys Bonds
Governments Want to Borrow Without Conditionality
bull Bond Borrowing Does Not Impose Direct Conditionality (as IMF)
Butbull lsquoIn the sovereign debt market national
governments borrow funds in order to compensate for revenue shortfalls or to fulfil other economic management objectiveshellipthose interest rates represent the governmentrsquos financing costs When market participants punish governments they do so by increasing the interest rates at which they will purchase government securitiesrsquo (Mosley 2003)
lsquoI used to think if there was reincarnation I wanted to come back as the President or the Pope or a 400 baseball hitter But now I want to come back as the bond market You can intimidate everyonersquo (James Carville Bill Clinton campaign strategist)
The Issues
bull How much can governments borrow sustainably
bull To what extent do governments in order to borrow have to follow the policy preferences of bond market investors
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Debt-to-GDP RatiosSelected Countries (2005)
bull Japan 1760bull Lebanon 1746bull Greece 1075bull Italy 1064bull United States 699bull Brazil 673bull Turkey 580bull China 125bull Estonia 48
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
bull lsquoEventually the debt would have to be repaid For a politician however eventually is a long time certainly farther in the future than the next electionrsquo (Frieden 2006 381)
Who Governments Borrow From Matters
bull lsquoWhy does anyone want to buy [the bonds of] a government which is allocatinghellipall its revenues on interest paymentsItrsquos a Ponzi schemersquo (Fund manager London interviewed 18 October 2005)
bull Need to understand the sources of government financing Who Buys Bonds
Governments Want to Borrow Without Conditionality
bull Bond Borrowing Does Not Impose Direct Conditionality (as IMF)
Butbull lsquoIn the sovereign debt market national
governments borrow funds in order to compensate for revenue shortfalls or to fulfil other economic management objectiveshellipthose interest rates represent the governmentrsquos financing costs When market participants punish governments they do so by increasing the interest rates at which they will purchase government securitiesrsquo (Mosley 2003)
lsquoI used to think if there was reincarnation I wanted to come back as the President or the Pope or a 400 baseball hitter But now I want to come back as the bond market You can intimidate everyonersquo (James Carville Bill Clinton campaign strategist)
The Issues
bull How much can governments borrow sustainably
bull To what extent do governments in order to borrow have to follow the policy preferences of bond market investors
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
bull lsquoEventually the debt would have to be repaid For a politician however eventually is a long time certainly farther in the future than the next electionrsquo (Frieden 2006 381)
Who Governments Borrow From Matters
bull lsquoWhy does anyone want to buy [the bonds of] a government which is allocatinghellipall its revenues on interest paymentsItrsquos a Ponzi schemersquo (Fund manager London interviewed 18 October 2005)
bull Need to understand the sources of government financing Who Buys Bonds
Governments Want to Borrow Without Conditionality
bull Bond Borrowing Does Not Impose Direct Conditionality (as IMF)
Butbull lsquoIn the sovereign debt market national
governments borrow funds in order to compensate for revenue shortfalls or to fulfil other economic management objectiveshellipthose interest rates represent the governmentrsquos financing costs When market participants punish governments they do so by increasing the interest rates at which they will purchase government securitiesrsquo (Mosley 2003)
lsquoI used to think if there was reincarnation I wanted to come back as the President or the Pope or a 400 baseball hitter But now I want to come back as the bond market You can intimidate everyonersquo (James Carville Bill Clinton campaign strategist)
The Issues
bull How much can governments borrow sustainably
bull To what extent do governments in order to borrow have to follow the policy preferences of bond market investors
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
bull lsquoEventually the debt would have to be repaid For a politician however eventually is a long time certainly farther in the future than the next electionrsquo (Frieden 2006 381)
Who Governments Borrow From Matters
bull lsquoWhy does anyone want to buy [the bonds of] a government which is allocatinghellipall its revenues on interest paymentsItrsquos a Ponzi schemersquo (Fund manager London interviewed 18 October 2005)
bull Need to understand the sources of government financing Who Buys Bonds
Governments Want to Borrow Without Conditionality
bull Bond Borrowing Does Not Impose Direct Conditionality (as IMF)
Butbull lsquoIn the sovereign debt market national
governments borrow funds in order to compensate for revenue shortfalls or to fulfil other economic management objectiveshellipthose interest rates represent the governmentrsquos financing costs When market participants punish governments they do so by increasing the interest rates at which they will purchase government securitiesrsquo (Mosley 2003)
lsquoI used to think if there was reincarnation I wanted to come back as the President or the Pope or a 400 baseball hitter But now I want to come back as the bond market You can intimidate everyonersquo (James Carville Bill Clinton campaign strategist)
The Issues
bull How much can governments borrow sustainably
bull To what extent do governments in order to borrow have to follow the policy preferences of bond market investors
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
The Ability to Borrow Matters to Governments
bull Borrowing enhances Government capacity to spend without raising revenue
bull lsquoa crucial advantage enjoyed by the United States [during the Cold War] was the ability to finance increased arms spending by selling bonds to the publicrsquo (Ferguson 2001 406)
bull lsquoEventually the debt would have to be repaid For a politician however eventually is a long time certainly farther in the future than the next electionrsquo (Frieden 2006 381)
Who Governments Borrow From Matters
bull lsquoWhy does anyone want to buy [the bonds of] a government which is allocatinghellipall its revenues on interest paymentsItrsquos a Ponzi schemersquo (Fund manager London interviewed 18 October 2005)
bull Need to understand the sources of government financing Who Buys Bonds
Governments Want to Borrow Without Conditionality
bull Bond Borrowing Does Not Impose Direct Conditionality (as IMF)
Butbull lsquoIn the sovereign debt market national
governments borrow funds in order to compensate for revenue shortfalls or to fulfil other economic management objectiveshellipthose interest rates represent the governmentrsquos financing costs When market participants punish governments they do so by increasing the interest rates at which they will purchase government securitiesrsquo (Mosley 2003)
lsquoI used to think if there was reincarnation I wanted to come back as the President or the Pope or a 400 baseball hitter But now I want to come back as the bond market You can intimidate everyonersquo (James Carville Bill Clinton campaign strategist)
The Issues
bull How much can governments borrow sustainably
bull To what extent do governments in order to borrow have to follow the policy preferences of bond market investors
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Who Governments Borrow From Matters
bull lsquoWhy does anyone want to buy [the bonds of] a government which is allocatinghellipall its revenues on interest paymentsItrsquos a Ponzi schemersquo (Fund manager London interviewed 18 October 2005)
bull Need to understand the sources of government financing Who Buys Bonds
Governments Want to Borrow Without Conditionality
bull Bond Borrowing Does Not Impose Direct Conditionality (as IMF)
Butbull lsquoIn the sovereign debt market national
governments borrow funds in order to compensate for revenue shortfalls or to fulfil other economic management objectiveshellipthose interest rates represent the governmentrsquos financing costs When market participants punish governments they do so by increasing the interest rates at which they will purchase government securitiesrsquo (Mosley 2003)
lsquoI used to think if there was reincarnation I wanted to come back as the President or the Pope or a 400 baseball hitter But now I want to come back as the bond market You can intimidate everyonersquo (James Carville Bill Clinton campaign strategist)
The Issues
bull How much can governments borrow sustainably
bull To what extent do governments in order to borrow have to follow the policy preferences of bond market investors
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Governments Want to Borrow Without Conditionality
bull Bond Borrowing Does Not Impose Direct Conditionality (as IMF)
Butbull lsquoIn the sovereign debt market national
governments borrow funds in order to compensate for revenue shortfalls or to fulfil other economic management objectiveshellipthose interest rates represent the governmentrsquos financing costs When market participants punish governments they do so by increasing the interest rates at which they will purchase government securitiesrsquo (Mosley 2003)
lsquoI used to think if there was reincarnation I wanted to come back as the President or the Pope or a 400 baseball hitter But now I want to come back as the bond market You can intimidate everyonersquo (James Carville Bill Clinton campaign strategist)
The Issues
bull How much can governments borrow sustainably
bull To what extent do governments in order to borrow have to follow the policy preferences of bond market investors
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
lsquoI used to think if there was reincarnation I wanted to come back as the President or the Pope or a 400 baseball hitter But now I want to come back as the bond market You can intimidate everyonersquo (James Carville Bill Clinton campaign strategist)
The Issues
bull How much can governments borrow sustainably
bull To what extent do governments in order to borrow have to follow the policy preferences of bond market investors
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
The Issues
bull How much can governments borrow sustainably
bull To what extent do governments in order to borrow have to follow the policy preferences of bond market investors
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Case Study EMBI Yields
0
5
10
15
20
25
3030
04
1998
300
819
98
301
219
98
300
419
99
300
819
99
301
219
99
300
420
00
300
820
00
301
220
00
300
420
01
300
820
01
301
220
01
300
420
02
300
820
02
301
220
02
300
420
03
300
820
03
301
220
03
300
420
04
300
820
04
301
220
04
300
420
05
300
820
05
301
220
05
300
420
06
300
820
06
301
220
06
300
420
07
300
820
07
Date
Yie
ld (s
a) Lebanon
Turkey
Brazil
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
John Zysman (1983) Governments Markets and
Growthbull lsquothe structure of finance contributes to the statersquos
capacity to act in the economyrsquo
Butbull Contrast is between financing that is (1) capital-
market based (2) credit-based with government-administered prices and (3) credit-based dominated by financial institutions
bull (1) US and UK (2) France and Japan and (3) West Germany
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
bull Furthermore
bull Zysman assumes a static financial structure Need to analyse change
bull Need for study of lsquoever more elaborate financial marketsrsquo
So
bull Financial systems need disaggregating and their analysis needs updating
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Differentiating Financial Market Actors
bull Consider Domestic and Foreign Investors Together
bull Consider Banks Individuals Pension Funds Mutual Funds Hedge Funds
Key Variable is Loyalty Linked to the Ability to Exit (Hirschman 1970)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Financialisation
bull Ability to Exit is Linked to the Ability to Trade Risk Financialisation
bull Financialisation = The Ability to Trade Risk (Aglietta and Breton 2001)
bull The Ability to Trade Risk is a function of the financialisation of a financial market actor and the financialisation of the market structure
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Examples of Differential Investor Loyalty
Time Scale of Investmentbull lsquomy 30 year bonds will never come back within the
next 30 yearsrsquo (Assistant General Manager 50 per cent foreign-owned Turkish bank interviewed 8 December 2005)
bull lsquothis position that Irsquove kept is three weeks oldhellipthatrsquos a long timeNobody buys and keeps things for six months a year I mean things changersquo (Hedge fund manager London interviewed 23 June 2005)
bull lsquolocals arehellipreallyhelliplooking for what is going to happen tomorrow or next week 95 per cent of the locals think like thisrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Examples of Differential Investor Loyalty
Disloyaltybull lsquoI canrsquot act like a hedge fund I canrsquothellip[sell short when Turkey
is hit by an earthquake] the hedge fund can do that and he wouldnrsquot care less if the news on the Turkish papers saying that they have shorted the market after the earthquakeI canrsquot do that Irsquom a real bank I gothellipclose to 5 million credit cards Im working with nearly every corporate in Turkey somehow on either a credit or a transaction basishellip[R]eputation means a lot to me I have much more good will in my corporate valuation than [a leading international hedge fund]rsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull lsquoIf I would think that in order to make money I would have to go short I would go short andhellipin my mind still my first job is still as a prop trader rather than a bank partner and thatrsquos how it works So my compensation has little to do with the bank resultrsquo (proprietary trader Brazilian bank interviewed 29 August 2006)
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Examples of Differential Investor Loyalty
Financing the Governmentbull lsquoat least I have to keephellipwhat I already have
with the governmentand if the governmentneeds some money I have to give itrsquo (Executive Advisor to Chairman Lebanese bank interviewed 8 September 2005)
bull lsquoIf you want to do something drastic you have to keep in mind that itrsquos going tohelliphave an impact on all the rest of your portfolio and assetsrsquo (Head of Treasury Turkish bank interviewed 7 December 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Examples of Differential Investor Loyalty
Performance Measurementbull lsquoI believehellipin free markets but you want to also act as a central
bankerhellipyour business dictates that you want to make profit but not necessarily short term profit or fees profit in the long termrsquo (Head of Treasury Lebanese bank interviewed 9 September 2005)
bull lsquothe fact that it[Brazil]rsquos a big part of the index mean that a lot of people need to own it in big amountsrsquo (hedge fund manager London interviewed 23 June 2005)
bull lsquoIf your investor base doesnrsquot care about month to month PampLhellip then you donrsquot worry about your stop losses because if you have a right call itrsquos going to take 12 months to play outhellip you donrsquot really carehellip Now investors who we have they want a weekly update on the PampLrsquo (hedge fund manager New York interviewed 15 May 2006)
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Examples of Differential Investor Loyalty
Financialisation of Market Structurebull lsquoUnfortunately when I want to sell Treasury papers
because of a certain political issue everybody is selling so there is no marketrsquo (Deputy General Manager Lebanese bank interviewed 2 September 2005)
bull lsquoyou cannot imagine a big bank unloading its securities portfolio into the market Thatrsquos not possiblersquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
bull A local derivatives market lsquowouldhellipfundamentally change the way Irsquom running my portfoliorsquo (Deputy General Manager Turkish bank interviewed 5 December 2005)
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
The Autonomy Curve
Financialisation
Government Policy AutonomyDomestic Banks
Domestic Individuals
Domestic Pension Funds
Domestic Mutual Funds
Domestic Hedge Funds
International Hedge FundsTotal Return Investors
International Mutual FundsIndex Following Investors
Each different investor type is placed on the autonomy curvebased on their financialisation and influence on the financialisation of the government bond market
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Movement Along the CurveThe Changing Ability to Trade Risk1 Financialisation of Market Structure
bull Regulation
bull New Financial Instruments Introduced
bull Primary Dealer System
bull Size of Market Individual Bonds
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Movement Along the CurveThe Changing Ability to Trade Risk2 Financialisation of Market Actorsbull Regulationbull Performance Measurementbull Transaction Costs (Size of Investor)bull Nature of Investment (Long-TermShort-
Term Leverage Disloyalty)bull Investment Mandatesbull Ease of Full Exit
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
The Height of the Curve
bull Government Borrowing Requirement (but Relative to the Capacity of the Most Loyal Investors to Provide Financing)
bull Relative Strength of Push and Pull Factors
bull Absolute Strength of Push Factors
bull Credit Ratings
bull Technology
bull Size of Economy
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Each Countryrsquos Overall Autonomy
Financialisation
Government Policy Autonomy
Lebanon
Brazil
Turkey
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-
Conclusions
bull To borrow without following investor policy preferences governments must borrow from loyal investors
bull Investor loyalty is linked to the financialisation of government bond market structure and different market actors
- Trading the Risk Financialisation Loyalty and Emerging Market Government Policy Autonomy
- lsquoFor years now Lebanon has been able to sustain a government debt-to-GDP ratio which is well beyond levels deemed sustainablersquo (IMF 2006)
- Debt-to-GDP Ratios Selected Countries (2005)
- The Ability to Borrow Matters to Governments
- Slide 5
- Slide 6
- Who Governments Borrow From Matters
- Governments Want to Borrow Without Conditionality
- Slide 9
- The Issues
- Slide 11
- John Zysman (1983) Governments Markets and Growth
- Slide 13
- Differentiating Financial Market Actors
- Slide 15
- Slide 16
- Financialisation
- Slide 18
- Examples of Differential Investor Loyalty
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
- Slide 26
- Slide 27
- Slide 28
- The Autonomy Curve
- Movement Along the Curve The Changing Ability to Trade Risk
- Slide 31
- The Height of the Curve
- Each Countryrsquos Overall Autonomy
- Conclusions
-