Government bond

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A government bond , government bond or government bond ( English sovereign bond or government bond ) is a public bond in which a State as a debtor acts.

In a broader sense, every type of public bond is sometimes referred to as a government bond - accordingly, this would also include any bond issued by a sub- government or a public company that provides its bonds with a state guarantee.

General

In addition to banks , insurance companies and other companies capable of issuing bonds , states also appear as debtors . You use the bond as a financing instrument . They benefit from the same advantages of broad diversification (on the international capital markets ), unrestricted trading ( international credit transactions ) and high fungibility (due to the form of the bearer bond ). In contrast to the other bond debtors, the creditworthiness of government bonds is not measured by annual financial statements , but by a state budget and the associated country risk . While all other bond debtors are legally insolvent , there are no insolvency regulations for states, but the possibility of a moratorium or national bankruptcy , which also - and in particular - affects government bonds. The international law has neither a uniform nor a codified insolvency law of states.

Reason for the emission of the issued by a state securities is usually the financing of budget deficits in the state budget, but can also be given by the state to be financed project. Government bonds reduce or fill the gap between lower government revenues and higher government spending if tax increases are to be avoided in whole or in part.

history

The forerunners of today's government bonds were the medieval “Prestiti” or “Prestanze” (loan) in Italy to finance war in Venice or Florence . In Venice, the Doge Vitale Michiel II took out a 4% loan from his Venetian citizens in 1156 - the first early form of government loan - and allowed them to set up a credit institute under the name of Monte Vecchio for the purpose of security. In Florence, Philipp Tuskhan and two brothers have been running the local pawnshop "casanam prestiti" since 1287. These were compulsory interest-bearing bonds from the small and city-states of northern Italy, which were often not repaid. As a result of war spending, Florence had a debt of 5 million florins in 1427 , which was financed with the help of war bonds . The state forced rich citizens in particular to participate financially in the financing of the war. Further war financing, however, caused the value of bonds already in circulation to fall further, so that the Venetian Montenuovo bonds were only 10% of their original value between 1509 and 1529.

Meanwhile, in November 1338, Edward III. from England money for the Hundred Years War with France, which the banker Bonifacio di Tommaso, among others , lent him to Peruzzi , but never got back. In 1568 Philip II financed the Eighty Years' War of the Netherlands against Spain with a government loan of 3 million guilders. Philip II had to declare national bankruptcy three times, namely in 1557, 1575 and 1596; this also applied to his war loans. On January 20, 1693, the British government issued the first modern government bond, the Tontine . In 1751, the “Consols bond” was the first government bond based on perpetual annuity . The state only committed itself to paying the interest (“pension”) and did not assume any repayment obligation, at most it granted itself a repayment right. The constant and ongoing interest payments have earned it the name "eternal annuity". This form was only allowed for government papers.

A letter dated January 11, 1814, appointed Nathan Mayer Rothschild as agent of the British government, buying French gold and delivering it to Admiral Wellington . This paid for his mercenaries , who were meanwhile marching to France. By May 1814, Rothschild had provided the British government with precious metals valued at just under 1.2 million pounds. Rothschild indirectly financed the Battle of Waterloo , which took place on June 18, 1815. But the hoped-for increase in value of the gold did not materialize due to the unexpectedly short course of the war, so that Rothschild used the remaining gold in July 1815 to purchase British government bonds. When it was sold in July 1817, the price had risen by 40%, so that Nathan Rothschild realized a price gain of around 600 million euros according to today's value and thus invested government bonds speculatively for the first time.

Article 103 of the Constitution of the Prussian State of January 31, 1850 stipulated that “loans for the treasury only take place on the basis of a law”. For example, Prussia took up government bonds on the basis of the law “relating to the consolidation of Prussian government bonds of December 19, 1869”. Both the Northern and Southern states took out war bonds to finance the Civil War . In 1863, the banks bought government bonds that were used to finance the Union Army . The poorer southern states offered pawn bonds with cotton as collateral in the same year . In May 1863 the northern states conquered Jackson (Mississippi) , the southern states finally capitulated on July 4, 1863 in Vicksburg (Mississippi) - also because they did not succeed in completely financing the high costs of the war with government bonds.

Argentine bonds play a special role in the history of government bonds, because they were hit by moratoria and national bankruptcy several times ( Argentina crisis ) and preoccupied international courts. Argentina stopped paying debt servicing ( interest and principal ) on its first government bond, issued in 1825, in 1829 for the next 28 years until 1857. This moratorium was followed by another in April 1987. In January 2001, the country finally declared a state of emergency , combined with the bankruptcy for government bonds in February 2001. At the end of 2005, government bonds reached around 50 percent of Argentina's public debt.

In September 1914, the German Empire brought a government bond onto the market that made the First World War financially possible in the first place and which economic columnist Leo Jolles called a "billion- dollar sacrifice" in an editorial at the time:

“The decline of the industrial sun had prepared the new chapter in the history of German government bonds. The rise of the industrial boom that was to come in the spring of 1914 failed to materialize; and the behavior of the stock market left no doubt that the hope for new dividend wins would not be fulfilled. […] The culmination of this development epoch is the result of the war bonds. [...] No object of value can be turned into money as easily as a German government paper. "

The Greek crisis in March 2012 also triggered partial debt relief for Greek government bonds. Since this did not take place with the consent of all bondholders, the ISDA determined that Greece was defaulting in March 2012 .

Legal issues

Government bonds are securities that give each individual creditor their own, independent contractual claim to payment from the issuer (debtor country). In continental Europe, they are used as bearer ( English "bearer bonds" issued), Anglo-American legal space preferred order bonds ( English "registered bonds" ) in which each holder is in particular performed in a creditor directory. As bearer securities, they are most fungible because they can be transferred to a new creditor by agreement and handover ; Order papers require an endorsement .

The German banking supervisory authority BaFin imposed a temporary ban on short sales for government bonds and shares in May 2010 , which was lifted again in March 2011.

Bond terms

The bond terms, which are negotiated between the debtor country and the issuing bank consortium, are of interest to investors . As a rule, this is based on the bond standards of the International Capital Markets Association (ICMA). These begin with the choice of law , which can be decided between the law of the issuing state or the law of major financial market jurisdictions. Since 1992, states that submit their bonds to US law and denominate them in US dollars can be sued in the US. The Argentine government bonds alone were subject to 8 different jurisdictions . Government bonds have the longest term of all bonds at 15 to 30 years . Interest and repayments are often handled by a paying agent ( English fiscal agent ) or a trustee ( English trustee ). Interest rate futures ( English coupon date ) is the coupon noted the maturity date of the bond interest (usually every six months or every year).

Please note clauses such as the pari passu clause , negative declaration , cross-default clause and the collective action clause , because they can have serious consequences for the investor in the event of a sovereign crisis affecting the bond debtor.

  • The pari passu clause assures bondholders absolute equality of their claims , in which the public sector policy is realized not to give any kind of claims an implicit primacy. The cited report states in para. 45a makes it clear that the goal of crisis management must not undermine the obligation of states to repay debt on time and in full.
  • This principle of formal equality is through the negative pledge expanded ( "negative pledge") to the collateral level by the clause assuring the unsecured bondholders collateralisation of their claims, the state should provide other lenders collateral.
  • In the case of the cross-default clause , the bondholders have a special right of termination if the debtor country serves their bond but falls behind with another payment obligation. This is intended to affect all creditors at the same time from the debtor country's payment difficulties.
  • The Collective Action Clause makes a change to individual bond terms dependent on the approval of the majority of the creditors and is binding for all bond creditors in the event of a majority approval. As a result, minorities can be outvoted and are, for example, forced to agree to debt relief.

Argentine government bond litigation

In the case of government bonds, it is customary to place the unsecured bondholders with a pari-passu clause on a par with other non-subordinated foreign liabilities. In section 8 (1) sentence 1 of the loan terms and conditions for bonds of the Republic of Argentina (issued in 1996 and 1997), it was generally referred to, without any restriction to certain types of liabilities, that these were "non-subordinated obligations" of the republic. Section 8 (1) sentence 2 of the bond terms and conditions additionally assured that the bond liabilities always rank with other unsecured and unsubordinated foreign liabilities within the meaning of Section 8 (4) of the bond terms and conditions. While the bondholders benefiting from the clause did not receive any interest payments on the due date from February 2001, debt servicing for the IMF was continued by Argentina, although the IMF was not formally among the senior creditors. In June 2014 this verdict, the US Supreme Court ( "US Supreme Court"), that Argentina can not make payments on restructured debt without providing payments to creditors, the restructuring have resists and therefore disapproved of the Argentine favor of the IMF. For the BGH , no general rule of international law can be established that entitles a state to temporarily refuse to meet private-law payment claims due under private law, citing the state of emergency declared due to insolvency or due to a debt rescheduling that has come about voluntarily with the majority of creditors. This judgment also forced Argentina to repay the government bonds issued in 1996 and 1997 to the disadvantaged creditors.

risk

Other countries, their central banks (such as the European Central Bank ), institutional investors such as banks , insurance companies, hedge funds , investment funds or even natural persons can be considered as creditors of government bonds .

The acquisition of government bonds creates a credit risk for creditors , which in the worst case can result in a moratorium or national bankruptcy. In terms of loan technology, this risk is realized through partial or complete debt relief . When the Greek debt relief in March 2012, bondholders had to forego 53.5 percent of their bond values. Foreign currency bonds occur in countries whose own currency is not internationally accepted as a bond currency. Then, in addition to the typical credit risk, creditors also have a transfer stop risk . This means that states and central banks that own foreign government bonds are also subject to a creditor risk, so that ultimately the taxpayers are indirectly liable for foreign government bonds.

The European Central Bank (ECB) has been buying large volumes of EU government bonds since 2015 as part of a high-volume purchase program . This controversial purchase of EU government bonds by the ECB on the secondary market since March 2015 should ostensibly prevent the risk of deflation , but it does result in undesirable government financing from the central bank. Their real goal is to stabilize risky government bonds and the financial markets. The ECB is prohibited from direct public financing on the primary market under Article 123 (1) TFEU .

The risk of the creditor of credit rating agencies such as Standard & Poor's , Moody's or Fitch by a credit rating ( Rating () for the state English sovereign rating ) measured. According to this, government bonds from countries with the highest credit rating are considered to be almost risk-free - as of October 2015, these included Denmark , Germany , Luxembourg , Canada , Norway , Sweden and Switzerland . In particularly poor ratings of the state - in the speculative, or equivalently: Worse than investment grade - is known as high-yield bonds or junk bonds ( English high yield bonds or junk bonds ). Bonds from countries that have already suffered a moratorium or even a national bankruptcy are particularly risky, because the risk of repetition is usually very high. The level of borrowing risk on a government bond can also be measured by the credit spread . It is the yield difference between the government bond under consideration and a risk-free reference bond with the same term. The riskier the government bond, the higher the credit spread. The credit risk from government bonds can be hedged in whole or in part with credit default swaps (CDS) . The collateral providers of these CDS are obliged to pay the secured bond amount to the collateral borrower if a credit event has occurred in the case of the government bond .

Economic importance

The economist David Ricardo had just before the Battle of Waterloo acquired a large scale gilts and sat thus on a victory for the British troops. When they won the battle, the share price increases made him one of the richest Britons. He is said to have made more than a million pounds sterling in profit. Ricardo, a staunch advocate of material budgetary equilibrium, advocated the abolition of government bonds in 1821 and came to the conclusion that tax increases were the better solution for financing extraordinary government needs. He was of the opinion that the bond issue - because it was more convenient than the tax increase - led the state to more generous consumption: "It is a system which tends to make us less thrifty".

Ricardo's esteemed teacher and friend Thomas Robert Malthus , however, assumed a victory for Napoleon. He did not share Ricardo's concerns, but neither did David Hume and Adam Smith 's concerns about government bonds. In 1820 Malthus considered the state credit indispensable and useful for many productive purposes, but also urged careful economy in government spending. Jean-Baptiste Say saw the greatest abuse in 1829 as "the big loans to lavish governments, with banks and the public almost always losing because governments were given the means to do evil" (namely, to wage wars). James Mill distinguished between absolutely harmful and relatively harmless national debt , but loathed war bonds. Malthus was in the minority compared to François Quesnay , Ricardo, Smith, Say or Mill, because their ideal was the debt-free state.

Government bonds are an important object of study in economics today because they are directly related to the state budget and have monetary effects. The state can compensate for its budget deficit by lowering government spending, increasing taxes and / or issuing government bonds. If the decision is made in favor of government bonds, they must represent the optimal form of financing and be profitable. Either they are directly profitable and enable debt servicing through their utility or only indirectly profitable if they generate corresponding additional tax revenues through secondary effects. The proceeds from the sale of the government bonds flow into the state budget in the form of income . As a result, the bonds cover a current deficit, but must be repaid through future tax revenues. They increase the total national debt , which worsens government debt metrics. They express whether the national debt is still adequate to the gross domestic product . Government bonds are therefore an indicator of government deficits and the unwillingness of the government to eliminate the structural budget problems that trigger a deficit in the medium term.

A central bank also influences the supply of money by buying or selling government bonds on the capital market . If the central bank purchases government bonds, this increases their stock exchange price and thus lowers their yield , which can lead to a falling market interest rate; at the same time the money supply increases with inflationary effect, and devaluation is the result. If the central bank buys government bonds with poor credit ratings on the secondary market, it relieves the seller of the credit risk and conducts government financing for other countries. The ECB is prohibited from direct public financing on the primary market under Art. 123 (1) TFEU , which is also prohibited in Art. 21.1 of the ECB Statute. The ECB program on May 2010 bypasses both the ban on the ECB government bonds to buy directly from the primary market and the non-assistance clause of Art. 125 TFEU.

Government bonds from different countries

Germany

The jargon of the stock exchange traders has brought new creations as short names for some government bonds . To the Federal securities include government bonds ( "Bunds"), Federal notes ( "Bobls") and Federal Treasury notes ( "treasures"), all of the German Finance Agency issued on federal commission.

The issue of these (private investor) federal securities was discontinued on December 31, 2012:

Typical for federal securities is their entry in the federal debt register , through which their tradability is made possible.

Austria

Also for Austrian government bonds (commonly known as "Bunds") are among the government bonds. The market volume per issue is between 100 million and 6 billion euros. The total outstanding volume for Austrian bonds is EUR 254.18 billion. In the next 5 years, 112.94 billion euros will be due (as of July 2020).

At the beginning of 2012, ÖBFA issued a government bond worth two billion euros over 50 years for the first time. It is the longest term to date and at the same time runs - currently until 2062 - the longest in the entire euro zone.

Switzerland

The Switzerland emitted a variety of "Switzerland-bonds", whose volume is per emission between 95 million and 5.6 billion Swiss francs. The outstanding volume of Swiss bonds is EUR 80.14 billion, of which EUR 27.44 billion will become due in the next 5 years (as of July 2020).

United States

The total outstanding volume for US Treasuries is 15.13 trillion euros. In the next 5 years 10.98 trillion euros will be due. Terms of 30 years are usual (as of July 2020).

"Treasuries" (named after the US Treasury Department of the Treasury ) are US government bonds. Treasury Bills ("T-Bills"), Treasury Notes ("T-Notes") and Treasury Bonds ("T-Bonds") are the most important forms of US Treasury bonds .

T-bills

"T-Bills" or "Treasury Bills" are short-term US government bonds with a term of 4 (~ 1 month), 13 (~ 1/4 year), 26 (~ 1/2 year) and 52 weeks (~ 1 Year). Due to the high market liquidity in this type of bond, the T-bills are among the most important instruments in the money market . When calculating the interest on T-bills, make sure that, according to the banking convention, 360 days per year (and not 365) are assumed. T-bills are zero coupon bonds that are issued through auctions where the discount is determined.

T-Notes

T-Notes have terms of 2, 3, 5, 7 and 10 years.

T-bonds

American government bonds with a term of between 10 and 30 years are known as "T-bonds".

Below the state level

Below the state level, so-called municipal bonds are issued with the subtypes general obligation bonds and revenue bonds . Municipal bonds are also English tax-exempts ( "Exempt") because it exempt from state income tax liability even (sometimes) be subject to local tax. While the general obligation bonds are serviced from the entire budget income of a local authority, certain tax income, fee or toll income detached from the general budget is reserved for the English revenue bonds . In the case of general obligation bonds , the creditors' risks are that the municipal budget is thinned out because certain tax revenues are only liable for English revenue bonds . With the latter, in turn, there is a risk that declining tax or fee income will no longer be sufficient for debt servicing; there is no general liability for the general budget. This is the reason that rating agencies have developed an “ issue rating ” which - similar to project financing - only assigns a rating code to the revenue bonds .

Great Britain

In Great Britain the government bonds "Gilts" are known, which are in circulation as "Short Gilts" (maturity <5 years), "Medium Gilts" (5-15 years) and "Long Gilts" (> 15 years).

Others

The Alliance - subsidiary PIMCO ( Pacific Investment Company ) is one of the world's largest investors in government bonds. It made headlines when it completely sold its holdings of US government bonds in February 2011.

See also

literature

  • Theodor Friedleben: Stock exchange handbook or a thorough description of the entire stock exchange traffic and government bond transactions: containing the practical instructions for their calculation according to the course in Amsterdam, Augsburg, Berlin, Frankfurt a. M., Hamburg, Leipzig, London, Paris and Vienna; with a historical introduction to government bonds and their repayment . Voigt, Ilmenau 1832 digitized

Individual evidence

  1. ↑ Sovereign Bond. In: investopedia.com. Retrieved February 16, 2017 .
  2. ↑ BVerfGE 118, 124
  3. ↑ Pierre des Essars: A History of Banking III , 1896, p. 153 f.
  4. ↑ Jean Engelhorn : Research on German regional and folklore , Volume 1, 1886, p. 412.
  5. ↑ William J. Bernstein: The Birth of Prosperity: How the Prosperity of the Modern World Arose , 2005, p. 158.
  6. ↑ Wolfgang Uchatius: It began in Italy. On the invention of the government bond , Zeit Online from August 25, 2011, p. 18.
  7. ^ Bradley D. Nash: Investment Banking in England , 1924, p. 12.
  8. ↑ Gunnar Folke Schuppert: Entangled Statehood: Globalization as Governance History , 2014, p. 220 f.
  9. ↑ Law Collection for the Royal Prussian States, 1850, p. 23.
  10. ↑ Law collection for the Royal Prussian States, 1850, p. 1197 f.
  11. ↑ Melchior Palyi, Paul Quittner: Handwortbuch des Bankingwesens , 1933, p. 496.
  12. ↑ Leo Jolles: The victory over the billion . In: Die Woche , issue 39/1914, p. 1606.
  13. ↑ Greece bankruptcy: hedge funds are compensated for haircut. In: Handelsblatt. March 9, 2012, accessed April 22, 2012 .
  14. ↑ Mauricio Hartwig-Jacob: The contractual relationships and the rights of investors in international bond issues , 2001, p. 22.
  15. ^ G7, Report of the Finance Ministers to the Köln Economic Summit , June 20, 1999, para 45 d.
  16. ↑ Alexander Szodruch: State insolvency and private creditors , 2008, p. 168 f.
  17. ↑ Supreme Court rejects Argentina's appeal in pari passu case , Stephen Bainbridge's Journal of Law, Politics, and Culture, June 16, 2014.
  18. ↑ BGH, judgment of February 24, 2015, Az .: XI ZR 47/14.
  19. ↑ Country ratings website, Börsenzeitung, accessed on July 1, 2015.
  20. ↑ Roland Tichy: Great Economists and Their Ideas , 2012, p. 22.
  21. ^ Sunday Times, September 14, 1823, Obituary David Ricardo .
  22. ↑ Helga Rybinski: The principle of budgetary equilibrium in a historical and dogma-historical view , 1964, p. 78.
  23. ^ David Ricardo: On the Principles of Political Economy, and Taxation , 1821, p. 286
  24. ↑ "the system tends to make us less economical".
  25. ^ Alfred Manes, Staatsbankrotte , 1919, p. 109.
  26. ↑ Jean-Baptiste Say: Handbook of the practical national economy , 1829, p. 64 .
  27. ^ Alfred Manes, Staatsbankrotte , 1919, p. 117.
  28. ^ Hans Janberg: Financing Handbook , 1964, p. 632.
  29. ↑ Internet site on federal securities , Finance Agency, accessed on April 7, 2015.
  30. ↑ The treasury note goes, security remains eFORUM: Federal securities 2012 (PDF; 801 kB), accessed on March 18, 2015.
  31. ↑ finanzen.net, Austria bonds
  32. ↑ Successful loan: Austria cancels February auction , accessed on January 20, 2012.
  33. ↑ finanzen.net, Switzerland bonds
  34. ↑ finanzen.net, US Treasuries
  35. ↑ a b Treasury Bills. In: TreasuryDirect . US Department of the Treasury, Bureau of the Public Debt, April 24, 2009, accessed November 24, 2009 .
  36. ↑ a b Hans Diwald: Understanding bonds , 2013, o. P.
  37. ^ Frank Reilly / Keith Brown, Investment Analysis and Portfolio Management , 2009, pp. 601 f.
  38. ↑ Werner Rügemer, Rating Agencies: Insights into the Capital Power of the Present , 2012, p. 123.

Web links

Wiktionary: Government bond  - explanations of meanings, word origins, synonyms, translations
Wikisource: Law regarding the Reich's guarantee for the interest etc. of an Egyptian government bond (German Reich, 1886)  - sources and full texts