B) Discuss the reasons which led to the creation of the UK debt market and its structural changes in the late 80s

Ex. 12. a) Read the text.

DISCUSSION

The UK Government bond market is generally the market of gilt-edged securities. These securities are considered to be very safe.

The market origins go back to 1694 when the Bank of England was founded to help the Government raise money to fight the French. Borrowing to finance wars has been common and the outstanding amount of debt has soared during all of the major wars since then. The major expansion, however, came in the post-World War II period, especially in the 1970s and early 1980s. Historically, the market developed with a strict separation between brokers and jobbers. The brokers did business with the public, but the jobbers did business only with brokers, and with each other.

On 27 October 1986 the market was structurally reorganized. As a result of the "Big Bang" the market switched to a new trading system, modelled on the US bond market. The essential change in this market was that a structure with separate jobbers and brokers was replaced with a structure with gilt-edged market makers (GEMMs) who deal directly with large customers.

The gilt-edged markets constitute the major proportion of money passing through the Stock Exchange. Transactions are typically much larger than in the equity market.

UK gilts consist of two distinct markets, the short gilts market (securities with five years or less to maturity) and the market for medium and long gilts.

Some time in the past there were forecasts that the gilt market would disappear by the end of the century. The Big Bang reforms succeeded in achieving one of the key objectives – to make the market accessible and attractive to international investors. There has been an increasing trend towards investors moving funds between the major bond markets, taking views on both the bonds themselves and the currencies involved. Now, in its current form it is firmly in the mainstream as one of the world's most actively traded bond markets.

As to the UK corporate bond market, it has had a mixed history. Historically, it has been a major source of corporate funds but issuance virtually stopped during the 1970s and early 1980s due to high inflation and large government issuance.

In the last few years, the market has sprung to life again, helped by the fall in long-bond yields due to inflation fall and temporary disappearance of the government's borrowing requirements.

Words у он may need:

gilt-edged securities золотообрезные ценные бумаги

origin n происхождение

the outstanding amount of debt размер непогашенного долга

soar v стремительно повышаться

broker n брокер

jobber n джоббер

Big Bang «Бит бенг» (реорганизация Лондонской фондовой биржи)

accessible adj доступный

mainstream n основное направление, главная линия

Ex. 13. Read the dialogue, sum up its content and act it out:

Eurobond Market

Russian: What is a Eurobond? Why are Eurobonds issued?

Foreigner: Eurobond is a bearer security, which is not registered and issued in a market other than that of its currency of denomination. Eurobonds are sold internationally and not in just one domestic market to obtain credits in foreign financial markets.

R.: What organizations can issue Eurobonds?

F.: As a rule, Eurobonds are issued by governments, municipalities, banks, international financial organizations, national companies and trasnationals.

R.: How is a bond placement arranged?

F.: Most often, primary placing of Eurobonds is done by investment banks, which act as lead managers. In such cases investment banks provide a number of advisory services. They give recommendations to issuers about the date of issue, currency of issue, coupons, methods of issuing securities, preparation of the necessary documents, etc.

R.: What is the typical maturity of Eurobonds?

F.: Eurobonds usually mature in five or more years, and have a fixed rate of interest.

R.: How is the bond price determined?

F.: It is done on the basis of the credit rating of the issuer. Debt issues are rated according to the credit ratings determined by various financial companies including Moody's, Standard and Poor's. The highest rating assigned by Standard and Poor's is AAA. It means that the capacity to pay the interest and repay the principal sum is extremely strong.

R.: And how often are interest payments made?

F.: Once or twice a year. It's important to say that Eurobonds are not taxed.

R.: How is the market developing?

F.: It has become one of the world's largest markets for short-term funds. Turnover in the market is now reckoned to be greater than the combined turnover of the New York and London stock exchanges.

R.: As you've said, investment bankers are the main intermediaries in this market, specializing in assisting firms to obtain new financing. And why is the market so attractive to borrowers?

F.: The market is outside the direct control of any national central bank, so it is free, competitive and flexible. It is characterized by relatively low capital costs for borrowers. Issuers can get cheap credits. I've read that Russia has issued its Eurobonds in the international bond market, and the first issues were successful.

R.: Yes, they were. So far Russia has made several placements of Russian Eurobonds. The first $1 billion issue with a 9.25% interest was made in Zurich, the second issue was made in Germany and was denominated in Deutsche marks. We are thinking of new issues.

F.: For what purposes will the funds obtained by your government be used?

R.: The money will be spent on resolving most burning social problems, including elimination of arrears and payment of wages and salaries.

F.: I must say here that in addition to Eurobonds denominated in a single currency, the market is moving in favour of the Euro.

Words you may need:

bearer security предъявительская ценная бумага

transnational n транснациональная компания

placement n размещение (ценных бумаг)

lead manager банк, являющийся организатором и гарантом займа

mature v наступать (о сроке платежа)

rate v присуждать рейтинг

turnover n оборот

Ex. 14. Give extensive answers to these discussion questions:

1. What role do financial markets play today?

2. What are the major financial markets today?

3. How can financial markets be classified?

4. What is a bond?

5. What is the difference between debt and equity markets?

6. What does the global bond market consist of?

7. How do you assess the Russian Bond market?

8. How are emerging bond markets developing? What problems are they facing?

9. How are bond placements arranged?

In order to get prepared for participation in the class discussion of the above questions, write a short essay on the following:

a) A bond as a financial instrument.

b) Financial markets.

(Use: to classify, to divide, to create, to develop, to emerge)

c) Bond market.

(Use: global, domestic, internal, external, national, foreign, to consist of, to decompose, issuer, to domicile)

Ex. 15. Prepare a short talk on the following:

a) Future of the Russian debt market.

b) Prospects of restructuring Russia's treasury bill debt and GKOs.

c) Your opinion about the role of Russian government bonds as an instrument of monetary policy and a means to finance the budget deficit.

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