Debt Market And Its
Impact on Indian
Classification of Indian Financial Market .......................................................................................... 3
What is a Debt Market? ....................................................................................................................... 4
Classification of Indian Debt Market .................................................................................................. 5
Classification on basis of trading ....................................................................................................... 7
Regulators for Indian Debt Market..................................................................................................... 9
The Structure of Indian Debt Market ............................................................................................... 10
Debt Instruments ................................................................................................................................ 11
Principal Investors .............................................................................................................................. 14
Major Reforms since 1990’s ............................................................................................................. 16
Type of Risks ...................................................................................................................................... 18
Debt vs Equity Market ....................................................................................................................... 19
Importance to the Economy .............................................................................................................. 21
Current Developments in the Debt Market ..................................................................................... 23
Micro-barriers – institutional issues ................................................................................................. 25
Macro barriers – demand and supply.............................................................................................. 26
External Debt ...................................................................................................................................... 27
Future of Debt Market ........................................................................................................................ 29
Worldwide Scenario .......................................................................... Error! Bookmark not defined.34
Bibliography ........................................................................................................................................ 35
CLASSIFICATION OF INDIAN FINANCIAL MARKET
Negotiable Non Negotiable Debt Equity
Govt Non Govt Primary Secondary
The financial markets can be classified in different ways. One way of classifying this is to
classify in respect of maturity of the instruments. Accordingly, the financial markets can be
classified into two main parts. They are as follows:
This is defined as that financial market where the maturity period of financial instruments
issued or traded is up to one year.
This is defined as that financial market where the maturity period of financial instruments
issued or traded is more than one year.
WHAT IS A DEBT MARKET?
The debt market is any market situation where trading debt instruments take place.
Examples of debt instruments include mortgages, promissory notes, bonds, and Certificates
of Deposit. A debt market establishes a structured environment where these types of debt
can be traded with ease between interested parties. Debt market refers to the financial
market where investors buy and sell debt securities, mostly in the form of bonds. These
markets are important source of funds, especially in a developing economy like India. India’s
debt market is one of the largest in Asia. Like all other countries, debt market in India is also
considered a useful substitute to banking channels for finance.
The Debt Market plays a very critical role for any growing economy which needs to employ a
large amount of capital and resources for achieving the desired industrial and financial
growth. The Indian debt market is today one of the largest in Asia and includes securities
issued by the Government (Central & State Governments), Public Sector
Undertakings(PSUs), other government bodies, financial institutions, banks and corporates.
The Indian debt markets with an outstanding issue size of Government securities (Central
and state) close to Rs.13,474 billion (or Rs. 1,34,7435 crore) and a secondary market
turnover of around Rs 56,033 billion (in the previous year 2007) is the largest segment of the
Indian financial markets. (Source: RBI &CCIL)
The debt market often goes by other names, based on the types of debt instruments that are
traded. In the event that the market deals mainly with the trading of municipal and corporate
bond issues, the debt market may be known as a bond market. If mortgages and notes are
the main focus of the trading, the debt market may be known as a credit market. When fixed
rates are connected with the debt instruments, the market may be known as a fixed income
Individual investors as well as groups or corporate partners may participate in a debt market.
Depending on the regulations imposed by governments, there may be very little distinction
between how an individual investor versus a corporation would participate in a debt market.
However, there are usually some regulations in place that require that any type of investor in
debt market offerings have a minimum amount of assets to back the activity. This is true
even with situations such as bonds, where there is very little chance of the investor losing his
or her investment.
The most distinguishing feature of the debt instruments of Indian debt market is that the
return is fixed. This means, returns are almost risk-free. This fixed return on the bond is often
termed as the 'coupon rate' or the 'interest rate'. Therefore, the buyer (of bond) is giving the
seller a loan at a fixed interest rate, which equals to the coupon rate.
CLASSIFICATION OF INDIAN DEBT MARKET
The Indian debt market can be classified into the following two categories:
Government Securities Market (G-Sec Market)
It consists of central and state government securities. It means that, loans are being taken
by the central and state government. It is also the most dominant category in the India debt
The G-Sec Market consists of state and central government securities. Government
Securities are mostly interest bearing dated securities issued by RBI on behalf of the
Government of India.
These securities are issued by the government to raise a public loan or notification in the
Official Journal. These bonds of law, bearer bonds, shares or bonds held in Bond Ledger
Account. They may be in the form of treasury bills or bonds dated.
Government securities are issued to the investor at face value and imply no default risk as
the securities carry sovereign guarantee. They also offer ample liquidity to the investor as he
can sell the security in the secondary market. They are also preferred due to the fact that
they entail no tax deduction at the source and can be redeemed at face value on maturity.
The Bond market consists of bonds issued by financial institutions, Corporate bonds and
debentures and Public Sector Units. These are issued in order to meet financial
requirements at a fixed cost. They thus remove uncertainty with regards to financial costs.
The bond market in India plays an important role in fund raising for developmental ventures.
Bonds are issued and sold to the public for funds.
There are many different types of bond markets in India Corporate Bond Market, the
municipal bond market, government and agency bond market, bond market financing and
mortgage bonds and security responsibility for the bond market.
The Bond market is very advantageous to invest in, however there are some disadvantages
associated with it. The returns maybe risk-free but are not as high as the returns from the
equities market. This means that the investor is assured returns but the returns are less.
Also the retail debt market in Indian is not very well developed yet so retail participation is
The government and corporate sector collectively mobilized Rs. 6,125,147 million (US $
120,219 million) from primary debt market, a rise of 64.54% as compared to the preceding
year. About 71.29% of the resources were raised by the government (Central and State
Governments). The turnover in secondary debt market aggregated Rs. 62,713,470 million
(US $ 1,230,883 million), 11.01% higher than that in the previous year. The share of NSE in
total turnover in debt securities witnessed stood at 5.36%.
CLASSIFICATION ON BASIS OF TRADING
Primary Debt Market
Debt securities are issued and sold by borrowers to lenders directly.
Secondary Debt Market
Investors buy and sell previously issued debt securities amongst themselves. The segments
in the secondary debt market based on the characteristics of the investors and the structure
of the market are further sub-divided as follows:
Retail Debt Market – involving participation by individual investors, Small trusts and
other legal entities in addition to the wholesale investor classes.
Wholesale Debt Market – where the investors are mostly Banks, Financial Institutions,
the RBI, Primary Dealers, Insurance companies, Provident Funds, MFs, Corporates and
FIIs. There are normally two types of transactions, which are executed in the Wholesale
Debt Market as follows:
An outright sale or purchase – transaction is a one where there is no intended
reversal of the trade at the point of execution of the trade. The Buy or sell transaction
is an independent trade and is in no way connected with any other trade at the same
or a later point of time.
A Repo trade – (which is normally referred to as a Repo trade) is a transaction
where the said trade is intended to be reversed at a later point of time at a rate which
will include the interest component for the period between the two opposite legs of
the transactions. So in such a transaction, one participant sells securities to other
with an agreement to purchase them back at a later date. The trade is called a Repo
transaction from the point of view of the seller and it is called a Reverse Repo
transaction from point of view of the buyer. Repos therefore facilitate creation of
liquidity by permitting the seller to avail of a specific sum of money (the value of the
repo trade) for a certain period in lieu of payment of interest by way of the difference
between the two prices of the two trades. Repos and reverse repos are commonly
used in the money markets as instruments of short-term liquidity management and
are also called as a Collateralised Lending and Borrowing Mechanism. Banks and
Financial Institutions usually enter into reverse repo transactions to manage their
reserve requirements or to manage liquidity.
The aggregate secondary market transactions in debt securities (including government and
non-government securities) increased by 11.0 % to Rs. 62,713,470 million (US $ 1,230,883
million) from Rs. 56,495,743 million (US$ 1,407,893 million). Non-government securities
accounted for a meagre 0.73% of total turnover in debt market. NSE accounted for about 5
% of total turnover in debt securities.
REGULATORS FOR INDIAN DEBT MARKET
Reserve Bank of India (RBI)
The Reserve Bank of India is the main controller for the Money Market. Reserve Bank of
India also controls and regulates the G-Secs Market. Apart from its role as a regulator, it has
to concurrently fulfill several other important objectives viz. running the borrowing program of
the Government of India, controlling inflation, ensuring adequate credit at reasonable costs
to various sectors of the economy, managing the foreign exchange reserves of the country
and ensure a stable currency environment.
Securities & Exchange Board of India (SEBI)
Regulator for the Indian Corporate Debt Market is the Securities and Exchange Board of
India (SEBI). SEBI controls bond market and corporate debt market in cases where entities
raise money from public during public issues. It regulates the method in which such moneys
are raised and tries to guarantee a fair play for the retail investor. It forces the issuer to make
the retail investor aware of the risks inherent in the investment by way and its disclosure
norms. SEBI is also a regulator for the Mutual Funds.
THE STRUCTURE OF INDIAN DEBT MARKET
Corporate bonds are debt securities issued by private and public corporations. Companies
issue corporate bonds to raise money for a variety of purposes, such as building a new
plant, purchasing equipment, or growing the business. When one buys a corporate bond,
one lends money to the "issuer," the company that issued the bond. In exchange, the
company promises to return the money, also known as "principal," on a specified maturity
date. Until that date, the company usually pays you a stated rate of interest, generally semi-
annually. While a corporate bond gives an IOU from the company, it does not have an
ownership interest in the issuing company, unlike when one purchases the company's equity
Corporate bonds tend to rise in value when interest rates fall, and they fall in value when
interest rates rise. Usually, the longer the maturity, the greater is the degree of price
volatility. By holding a bond until maturity, one may be less concerned about these price
fluctuations (which are known as interest-rate risk, or market risk), because one will receive
the par, or face, value of the bond at maturity. The inverse relationship between bonds and
interest rates—that is, the fact that bonds are worth less when interest rates rise and vice
versa can be explained as follows:
When interest rates rise, new issues come to market with higher yields than older
securities, making those older ones worth less. Hence, their prices go down.
When interest rates decline, new bond issues come to market with lower yields than
older securities, making those older, higher-yielding ones worth more. Hence, their
prices go up.
As a result, if one sells a bond before maturity, it may be worth more or less than it was
Treasury bills are short-term debt instruments issued by the Central government. There are
3 types of T-bills which are issued: 91-day, 182-day and 364-day, representing the 4 types of
tenors for which these instruments are issued. Until 1988, the only kind of Treasury bill that
was available was the 91-day bill, issued on tap; at a fixed rate of 4.5% (the rates on these
bills remained unchanged at 4.5% since 1974!). 182-day T-bills were introduced in 1987,
and the auction process for T-bills was started. 364 day T-bill was introduced in April 1992,
and in July 1997, the 14-day T-bill was also introduced. RBI had suspended the issue of
182-day T- bills from April 1992, and revived their issuance since May 1999. RBI did away
with 14-day and 182-day Treasury Bills from May 2001. It was decided in consultation with
the Central Government to re-introduce, 182 day TBs from April 2005. All T-bills are now
sold through an auction process according to a fixed auction calendar, announced by the
RBI. Ad hoc treasury bills, which enabled the automatic monetisation of central government
budget deficits, have been eliminated in 1997. All T-bill issuances now represent market
borrowings of the central Treasury bills (T-bills) are short-term debt instruments issued by
the Central government. Three types of T-bills are issued: 91-day, 182-day and 364-day, T-
bills are sold through an auction process announced by the RBI at a discount to its face
value. RBI issues a calendar of T-bill auctions. It also announces the exact dates of auction,
the amount to be auctioned and payment dates. T-bills are available for a minimum amount
of Rs. 25,000 and in multiples of Rs. 25,000. Banks and PDs are major bidders in the T-bill
market. Both discriminatory and uniform price auction methods are used in issuance of T-
bills. Currently, the auctions of all T-bills are multiple/discriminatory price auctions, where the
successful bidders have to pay the prices they have actually bid for. Non-competitive bids,
where bidders need not quote the rate of yield at which they desire to buy these T-bills, are
also allowed from provident funds and other investors. RBI allots bids to the Non-competitive
bidders at the weighted average yield arrived at on the basis.
In corporate law, a stock certificate (also known as certificate of stock or share certificate)
is a legal document that certifies ownership of a specific number of stock shares (or fractions
thereof) in a corporation. In large corporations, buying shares does not always lead to a
stock certificate (in a case of a small number of shares purchased by a private individual, for
Stock certificates are generally divided into two forms as follows:
Registered Stock Certificates – A registered stock certificate is normally only evidence of
title, and a record of the true holders of the shares will appear in the stockholder's register of
Bearer Stock Certificates – A bearer stock certificate, as its name implies is a bearer
instrument, and physical possession of the certificate entitles the holder to exercise all legal
rights associated with the stock. Bearer stock certificates are becoming uncommon: they
were popular in offshore jurisdictions for their perceived confidentiality, and as a useful way
to transfer beneficial title to assets (held by the corporation) without payment of stamp duty.
International initiatives have curbed the use of bearer stock certificates in offshore
jurisdictions, and tend to be available only in onshore financial centres, although they are
rarely seen in practice.
A promissory note, referred to as a note payable in accounting, or commonly as just a
"note", is a negotiable instrument, wherein one party (the maker or issuer) makes an
unconditional promise in writing to pay a sum of money to the other (the payee), either at a
fixed or determinable future time or on demand of the payee, under specific terms. They
differ from IOUs in that they contain a specific promise to pay, rather than simply
acknowledging that a debt exists. In common speech, other terms, such as "loan," "loan
agreement," and "loan contract" may be used interchangeably with "promissory note" but
these terms do not have the same legal meaning. Whereas a promissory note is evidence of
a loan, it is not the loan contract, which would contain all the terms and conditions of the loan
Commercial Papers when issued in Physical Form are negotiable by endorsement and
delivery and hence highly flexible instruments.
Issued subject to minimum of Rs 5 lakh and in the multiples of Rs. 5 Lac thereafter.
Maturity is 15 days to 1 year.
Unsecured and backed by credit of the issuing company.
Can be issued with or without Backstop facility of Bank / FI.
A bearer bond is a debt security issued by a business entity, such as a corporation, or by a
government. It differs from the more common types of investment securities in that it is
unregistered – no records are kept of the owner, or the transactions involving ownership.
Whoever physically holds the paper on which the bond is issued owns the instrument. This is
useful for investors who wish to retain anonymity. Recovery of the value of a bearer bond in
the event of its loss, theft, or destruction is usually impossible.
Zero Coupon Bond
In such a bond, no coupons are paid. The bond is instead issued at a discount to its face
value, at which it will be redeemed. There are no intermittent payments of interest. When
such a bond is issued for a very long tenor, the issue price is at a steep discount to the
redemption value. Such a zero coupon bond is also called a deep discount bond. The
effective interest earned by the buyer is the difference between the face value and the
discounted price at which the bond is bought. There are also instances of zero coupon
bonds being issued at par, and redeemed with interest at a premium. The essential feature
of this type of bonds is the absence of intermittent cash flows.
Floating Rate Bonds
Instead of a pre-determined rate at which coupons are paid, it is possible to structure bonds,
where the rate of interest is re-set periodically, based on a benchmark rate. Such bonds
whose coupon rate is not fixed, but reset with reference to a benchmark rate, are called
floating rate bonds.
Bonds that allow the issuer to alter the tenor of a bond, by redeeming it prior to the original
maturity date, are called callable bonds. The inclusion of this feature in the bond’s structure
provides the issuer the right to fully or partially retire the bond, and is therefore in the nature
of call option on the bond. Since these options are not separated from the original bond
issue, they are also called embedded options. A call option can be a European option, where
the issuer specifies the date on which the option could be exercised. Alternatively, the issuer
can embed an American option in the bond, providing him the right to call the bond on or any
time before a pre-specified date.
Bonds that provide the investor with the right to seek redemption from the issuer, prior to the
maturity date, are called puttable bonds. The put options embedded in the bond provides the
investor the rights to partially or fully sell the bonds back to the issuer, either on or before
pre-specified dates. The actual terms of the put option are stipulated in the original bond
A convertible bond provides the investor the option to convert the value of the outstanding
bond into equity of the borrowing firm, on pre-specified terms. Exercising this option leads to
redemption of the bond prior to maturity, and its replacement with equity.
Institutional investors are organizations which pool large sums of money and invest those
sums in securities, real property and other investment assets. They can also include
operating companies which decide to invest its profits to some degree in these types of
Types of typical investors include banks, insurance companies, retirement or pension funds,
hedge funds, investment advisors and mutual funds. Their role in the economy is to act as
highly specialized investors on behalf of others. For instance, an ordinary person will have a
pension from his employer. The employer gives that person's pension contributions to a
fund. The fund will buy shares in a company, or some other financial product. Funds are
useful because they will hold a broad portfolio of investments in many companies. This
spreads risk, so if one company fails, it will be only a small part of the whole fund's
Institutional investors will have a lot of influence in the management of corporations because
they will be entitled to exercise the voting rights in a company. They can actively engage in
corporate governance. Furthermore, because institutional investors have the freedom to buy
and sell shares, they can play a large part in which companies stay solvent, and which go
under. Influencing the conduct of listed companies, and providing them with capital are all
part of the job of investment management.
Provident funds are large investors in the bond markets, as the prudential regulations
governing the deployment of the funds they mobilise, mandate investments pre-dominantly
in treasury and PSU bonds. They are, however, not very active traders in their portfolio, as
they are not permitted to sell their holdings, unless they have a funding requirement that
cannot be met through regular accruals and contributions.
Primary dealers, who are market intermediaries appointed by the Reserve Bank of India who
underwrite and make market in government securities, and have access to the call markets
and repo markets for funds A pre-approved bank, broker/dealer or other financial
institution that is able to make business deals with the U.S. Federal Reserve, such
as underwriting new government debt. These dealers must meet certain liquidity and quality
requirements as well as provide a valuable flow of information to the Fed about the state of
the worldwide markets these primary dealers, which all bid for government contacts
competitively, purchase the majority of Treasuries at auction and then redistribute them to
their clients, creating the initial market in the process.
Mutual funds have emerged as another important player in the debt markets, owing primarily
to the growing number of bond funds that have mobilised significant amounts from the
investors. Most mutual funds also have specialised bond funds such as gilt funds and liquid
funds. Mutual funds are not permitted to borrow funds, except for very short-term liquidity
requirements. Therefore, they participate in the debt markets. A bond fund is a collective
investment scheme that invests in bonds and other debt securities. Bond funds typically
pay periodic dividends that include interest payments on the fund's underlying securities plus
periodic realized capital appreciation. Bond funds typically pay higher dividends than CDs
and money market accounts. Most bond funds pay out dividends more frequently than
individual bonds bond fund account for 18% of mutual fund assets. Types of bond funds
include term funds, which have a fixed set of time (short-, medium-, or long-term) before they
mature. Municipal bond funds generally have lower returns, but have tax advantages and
lower risk. High-yield bond funds invest in corporate bonds, including high-yield or junk
bonds. With the potential for high yield, these bonds also come with greater risk.
Others financial institutions, local authorities, trusts, joint stocks companies, NRI
State Governments, municipalities, local bodies, etc. which issue securities in the debt
markets to fund their developmental projects, as well as to finance their budgetary deficits.
Central and state government
Central Governments raising money through bond issuances to fund budgetary deficits and
other short & long term funding requirements.
Banking sector RBI SBI other commercial banks cooperative banks
Reserve Bank of India, as investment banker to the government, raises funds for the
government through bond and T-bill issues, and also participates in the market through
open- market operations, in the course of conduct of monetary policy. The RBI regulates the
bank rates and repo-rates and uses these rates as tools of its monetary policy. Changes in
these benchmark rates directly impact debt markets and all participants in the market.
MAJOR REFORMS SINCE 1990’S
India’s macro management of debt has gone through three phases as follows:
Phase I (1950 to 1986)
Phase 1 was characterized by a captive market and the absence of debt management. This
was the consequence of relying on reserve requirements and a policy of directed investment
coupled with an emphasis on raising cheaper resources to finance the government’s
Phase II (1986 to 1992)
Phase 2 saw a gradual shift toward passive debt management because of concern about
expected future developments and the potential danger of continuing with automatic
monetization. These efforts culminated in the active management of debt in phase 3.
Phase III (1992 onward)
As an integral part of a comprehensive program of financial sector reform, India’s
government securities market (GSM) has undergone a huge transformation since 1991/92.
The main objective of this active debt management policy has been to moderate liquidity
growth, contain inflationary pressure, and conduct debt management in a cost-effective
manner. Considering India’s macro management and micro market structure, the
developments since 1991/92 can be divided into following sub phases.
A primary auction market for Government securities has been created and a primary
dealer system was introduced in 1995.
Abolition of tax deduction at source – Tax deduction at source (TDS) used to be
major impediment to the development of the government securities market. This not
only distorted the pricing mechanism, but also rendered trading in Government
securities cumbersome. Recognizing this, the RBI convinced the Government to abolish
it. The removal of TDS on Government securities was apparently a small but a major
reform in removing pricing distortions for Government securities.
Introduction of auctions – The auction system introduced in a minor way in the
second half of the eighties, and in a major way in the beginning of the nineties was a
significant move to allow the markets to determine the prices for government securities.
For such a major policy shift from administered interest rate regime to a market based
regime, the choice of auction system needed to be carefully drawn, in order to give a
comfort level to the government as a borrower as also to moderate the risks that might
be faced by the uninitiated market participants. Accordingly, it was decided to begin with
for ―the sealed bid auction system with a post bid reserve price‖ (since the Reserve
Bank of India as an agent to government participates in the auctions as a non-
competitive bidder). Over a period of time, RBI withdrew from the primary market and
with the enactment of Fiscal Responsibility and Budget Management Act, the
government debt is being raised at market related rates through auctions.
Banks investments in Government securities valuation/accounting norms –
Concomitantly, regulatory initiatives in introducing international best practices in
valuation/accounting norms for the banks’ investment portfolios (comprising mainly
government securities) also necessitated the banks to mark to market their investment
portfolios and forced them to actively trade. This gave an added impetus to the incipient
Introduction of Primary Dealers system – Introduction of Primary Dealers (PDs) into
the Government securities market brought a sea change in both the primary market (in terms
of finer bidding) and secondary market (in terms of added liquidity and enhanced trading
activity). In order to reduce Bank’s role in the Primary Issuances the PDs were encouraged to
underwrite primary issuances through incentives such as underwriting commissions.
Reforms were engineered to facilitate ―market-borrowing,‖
with price discovery through auctions;
restrict automatic monetization by fixing a cap on the during-the-year and end-year
develop appropriate instruments;
introduce a delivery-versus-payment system (DVP) in order to mitigate the settlement
promote greater transparency of prices and volumes traded through daily publication of
transactions in government securities;
introducing a system of primary dealers (PDs) and satellite dealers, with underwriting or
bidding commitment for 100% of the issue;
introducing various tenors in treasury bills and publishing a half-yearly calendar for the
issuance of treasury bills;
establishing ways and means advances (WMAs) to the central government to bridge
temporary mismatches in its receipts and payments;
permitting foreign institutional investors to invest in government securities including
Treasury bills, both in primary and in secondary markets;
switching over from yield-based to price-based auctions, to facilitate finer bidding;
TYPE OF RISKS
Government bonds are subject only to interest rate risk. However, corporate bonds are
subject to credit risk in addition to interest rate risk. Credit risk subsumes the risk of default
as well as the risk of an adverse rating change.
The returns maybe risk-free but are not as high as the returns from the equities market.
Default Risk/Credit Risk : corporate bonds are subject to credit risk in addition to
interest rate risk arises when an issuer of a bond defaults on the interest or principal
Interest Rate Risk can be defined as the risk emerging from an adverse change in the
interest rate prevalent in the market, which would affect the yield on the existing
instruments. For instance, an upswing in the prevailing interest rate may lead to a
situation where the investors' money is locked at lower rates. If they had waited and
invested in the changed interest rate scenario, they would have earned more.
Reinvestment Rate Risk: Can be defined as the probability of a fall in the interest rate
resulting in a lack of options to invest the interest received at regular intervals at higher
rates at comparable rates in the market.
The following are the risks associated with trading in debt securities:
Counter Party Risk refers to the failure or inability of the opposite party in the contract
to deliver either the promised security or the sale value at the time of settlement.
Price Risk refers to the possibility of not being able to receive the expected price on any
order due to an adverse movement in the prices.
DEBT VS EQUITY MARKET
Time of Fixed Not Fixed
Amount of Fixed Not Fixed
Repayment Not dependent on performance of Dependent on performance of the
commitment the Company company
Relative More Less
Riskiness of Less More
Expected Less More
Return of the
In case of debt markets
If people want to invest in the debt market it has to invest in large amount.
Moreover, the information is not widely distributed with respect to debt market and people
awareness need to be created more in the debt market.
Debt can be raised in the form of loan and in the form of marketable financial securities
which is also called as Debenture.
In the case of loan the lender would not be able to realise the money till the borrower
In the case of debenture, the lender would be able to realise the money even before the
borrower pays as it has a theoretical secondary market.
However, in practice, there is not much of difference between loan and debenture market.
In the case of debt market, the retail debt market hardly exists.
The return in debt market is less volatile as there is a clear cut linkage between the price
of the debt security and the variable which would change the price of the security.
In case of Equity Markets
In the case of equity market people can invest directly in the market by way of small
amount of investment.
In the case of equity market retail equity market already exists.
However in the case of equity market the return is highly volatile as there is no clear cut
linkage can be established between the variables and the price of the equity security.
Daily Trends in FII Investments on 30-NOV-2009
Gross Purchases(Rs Gross Sales(Rs Net Investment (Rs Net Investment
Reporting Date Debt/Equity (1 USD TO
Crores) Crores) Crores) US($) million
30-NOV-2009 Equity 1420.80 2151.10 (730.30) (156.00)
Debt 206.10 458.00 (252.00) (53.80)
The data presented above is compiled on the basis of reports submitted to SEBI by custodians on 30-
NOV-2009 and constitutes trades conducted by FIIs on and upto the previous trading day(s).
* Conversion rate: With effect from January 01, 1999, the daily RBI reference rate as on the trading day
has been adopted. (If the trading day is a bank holiday, immediately preceding day's reference rate has
IMPORTANCE TO THE ECONOMY
If we analyse the thought process of Indian investors then we will find that they are always
attracted towards equity market as compared to debt.
This may be due to its hype about higher returns, as we all know higher returns are always
associated with higher risk. If we think at a global level, then in maximum countries, Debt
market is much more popular than equity because of its low risk and fixed return nature but
the trends are just the reverse in India. Although debt market is much convenient and
suitable for Indian investors, it is not much popular may be due to unawareness about its
product range. The debt market performance is directly related to the interest rate
movement and this is reflected in the yields of government bonds, corporate debentures,
MIBOR-related commercial papers, and non-convertible debentures. That is why we can
term the debt market as a fixed income market.
If we compare equity market & the bond market during the past decade, the equity market
experienced a drop from 42 per cent of GDP in 1993-94 to 28.6 per cent in 2000-01. This
was not the case with the Government of India (GOI) bond market as it experienced an
increase in market size due to large scale fiscal deficits, from 28 per cent of GDP to 36.7
per cent in the same period. This resulted in a reduction in liquidity in the equity market and
a substantial improvement in liquidity in the Indian bond market. Indian debt market is
largest debt market in Asia and it is the crucial source of capital funds. It includes
government securities, financial institutions, public sector undertakings, other government
bodies, banks, and companies.
The development of bond market in India, in recent times, has amazed a lot of people. The
corporate debt market in India has seen growth of asset backed securities which were
found to be quite innovative in the recent past. The inception of corporate bond has
witnessed greater innovations. Instruments such as floating rate instruments, convertible
bonds, step redemption bonds, zero coupon bonds gained greater recognition. Total trading
in corporate bonds increased by 116% from an average of Rs1, 550 crore in October 2009
to Rs3, 356 crore in March 2010. This is the total amount that has been reported in the
National Stock Exchange and the Bombay Stock Exchange as well as the Fixed Income
Money Market and Derivatives Association of India. The corporate bond market is
establishing in India and we are more confident in accessing this market. Investment by
Foreign institutional investors (FIIs) so far this year is Rs870 crore in Indian debt market as
compared with Rs105 crore in 2009.
Normally the Government Securities are issued to meet the short term and long term
financial goals of the government, they are not only used as instruments for raising debt,
but also have emerged as key elements for internal debt management, short term liquidity
management and monetary management. The returns earned on the government securities
are usually taken as the benchmark rates of returns and are referred to as the risk free
return in financial theory. The Risk Free rates obtained from the G-sec rates are often used
to price the other non-govt. securities in the financial markets.
Even after several attempts by regulator Securities and Exchange Board of India (SEBI),
Indian corporate bond market has never quite taken off. Average daily trading has not
exceeded $1 billion (around Rs 4,440 Crore) where the global average is $1.5 trillion. Rise
in recent numbers shows that there's different activity happening in the corporate debt
market. This is mainly due to new reporting rules enforced by SEBI.
Although India has a vibrant equity market, Government and Sebi are taking steps to
develop debt market but still there is an absence of bond market which is required for
funding of long-term infrastructure projects. Infrastructure- recognized by business,
government and investors alike as a critical constraint on India's economic growth-could be
an important catalyst for the development of the debt market. The benefits of modernizing
and expanding India's inadequate infrastructure could be sizeable; the World Bank
estimates that a 1% permanent increase in the infrastructure stock is generally associated
with a 1% increase in the level of GDP. Striking a cautionary note, the World Bank also
estimates that infrastructure investment needs to rise by three to four percentage points of
GDP over the medium term if India has to sustain current growth rates. According to the
Indian government estimation, the country needs to invest $475bn in infrastructure over the
next five years. The debt market makes a natural home for infrastructure financing, by
matching long-term projects with long-term investors, drawing on institutional investors'
pricing expertise and improving transparency around projects and pricing. Moreover,
infrastructure debt should find natural buyers in the pensions and insurance funds that are
seeking long duration and implicit inflation links.
So, the increment in a bond market is critical for India's success, it is a challenge but many
things can be done for faster development of this market in India. Again as a common
Indian investor we are hoping to see some progress in Indian debt market soon. Because
development in debt market will develop Indian investors and Indian investors will develop
CURRENT DEVELOPMENTS IN THE DEBT MARKET
Activity in the Indian bond market saw a 30% jump in 2010. And not just volumes
widening, credit spectrum and innovative issuances point to a steady evolution. The
Indian bond market may have taken its time getting started, but it is clearly picking up
speed. Investors are no longer hiding behind safe top-rated paper. Vikram Kotak -
CIO, Birla Sun Life Insurance says, ―Banks are not able to lend enough to the
corporate and there are corps who are out with a different rating structure, maturity
and tenor to the private market.‖
There is always appetite from different class of investors and not everyone follows a
AA+ or AAA, or P1+ norms, so there r many investors with different kind of objectives
of investments. Public sector banks like SBI, Bank of Baroda, Union Bank and mutual
funds like Religare, UTI and LIC are actively accessing the wider credit spectrum.
Innovative trades are also gathering pace. In 2010, lesser-rated infrastructure
companies issued bonds to Tax free infra bonds, and a few retail debenture issuances
by companies like the Tatas have also boosted interest. But are these trends
sustainable? Some say a majority of these category issuances came when liquidity
was not an issue, and thinned out when cash dried up. But others say the first few
steps towards a deeper market have already been taken, and more will follow. What's
interesting is that regulator-backed products like repo in corporate bonds and interest
rate futures have not made much headway.
Tightening of liquidity, hardening interest rates on rupee loans and an international
demand for Indian debt instruments are driving top Indian corporate houses and banks
to the G3 bond market this year, say bankers. If trends continue, 2011 could see over
$10 billion worth of dollar and euro bond issues for the country.
From a near non-existent presence in the tradable bond market in 2009, Indian banks
and corporate leaders like Reliance Industries and Aditya Birla Groups have set
benchmarks for investors and issuers from India alike, says David Greenbaum, head
of Cross Border Debt Capital Market Origination, South Asia, at Deutsche Bank.
Deutsche Bank, India. The bank was one of the largest facilitators for such bond
issues, acting in 13 issues worth over $1.7 billion in 2010.
The most hailed candidates for these bonds are companies with a credit rating higher
or equal to the sovereign rating, public sector units and banks. The bonds present
longer-term borrowings at fixed costs reducing variable elements for companies amid
volatile market conditions. Yet, because they are traded, they provide liquidity for
investors, making it a win-win situation for both, bankers said.
Indian companies have been making large acquisitions and investments in overseas
operations across sectors, and since the interest on dollar loans is lower than rupee
loans, many prefer to raise funds overseas. They have a number of options such as
equity-linked convertible loans, external commercial borrowings and the bonds.
CRISIL believes that the Indian banking sector`s incremental credit-deposit (CD) ratio
will moderate to less than 90% by the end of March 2011. This will be driven primarily
by CRISIL`s expectation of lower credit growth, because of higher lending rates,
coupled with improvement in retail deposit mobilisation, because of recent deposit rate
hikes. For the nine months ended Dec. 31, 2010, the incremental CD ratio rose
sharply to 105%. A high incremental CD ratio indicates weakness in the sector`s
resource profile, reflecting the inadequacy of retail deposits to support credit growth.
The gap between tenures of credit and deposits, on account of growth in loans to
infrastructure projects, however, poses a longer term challenge of increasing asset-
liability mismatches (ALM) in the banking system. CRISIL believes that active steps to
develop the bond markets are needed to mitigate the impact of such emerging ALM
The corporate credit market is booming like never before with foreign institutional
investors pumping money into Indian debt and companies looking to raise more funds
through overseas borrowings and commercial papers. The new base rate regime for
bank loans and the government’s decision to raise foreign institutional investment (FII)
limit in debt have been the clear game changers. The new RBI guidelines permitting
repurchase of corporate bonds could broaden the corporate bond market further.
MICRO-BARRIERS – INSTITUTIONAL ISSUES
Much analysis has been devoted to micro-barriers to development of the bond market.
The most significant of these are as follows:
The disclosure requirements for public issues are very great and do not make
allowance for previous disclosures. The issuance process is perceived to be risky,
inflexible, cumbersome and expensive. In consequence, public bond issues are
extremely rare, and private consequence, public bond issues are placements
dominate the market. SEBI is examining the prospects for changing the disclosure
Stamp duty is complex and variable between locations, and adds a significant cost to
bond issuance. There are discussions and proposals significant cost to simplify and
reduce the stamp duty burden, the most significant of which is to place a maximum
amount of tax payable on a single issue.
Regulatory overlap exists, as corporate bonds tend to fall between several regulators:
SEBI, as the capital markets regulator; the RBI, as the regulator of banks (who are the
main investors in corporate bonds); and other regulators, such as the insurance
regulator (IRDA) and the Department of Commerce.
Lack of risk management products (both derivatives and grey markets) is a significant
barrier both to the primary and secondary markets. While the Indian market has been
innovative in developing products that add efficiency (such as CLBOs), or that aid the
equity market (for example, exchange-traded derivatives), it has not been as
successful in developing ways to manage interest rate risk. The main barrier to
developing interest rate derivatives has been a combination of lack of diverse views,
and restrictions on the participation of banks imposed by the RBI.
MACRO BARRIERS – DEMAND AND SUPPLY
The macro problems are more serious, and are less likely to be addressed directly or
independently of larger issues relating to India’s economic development. The following lists
the key macro problems:
Crowding out has been a persistent threat to Indian market. Legislation, (especially the
Fiscal Responsibility Act), and a desire to control the deficit, mean that government
demand is falling relative rapidly growing GDP, however. Despite this, the level of
issuance of government bonds remains high, and the level of debt to GDP is very high,
Corporate borrowers have traditionally had little need to diversify their financing, as
ample bank finance has always been available. This continues to be the case in India,
where the range of options offered by banks to their corporate clients includes a mixture
of loan and pseudo-loan finance (that is, private placement of bonds to a single or
limited number of investors, mainly other banks).
Although insurance and pension funds are still largely state-controlled, there is a
growing market for private savings/pension arrangements as wealth increases. The life
insurance sector is dominated by a single state-owned entity, and both it and the private
funds are governed by highly restrictive, government imposed investment mandates,
which limit their ability to invest in corporate debt. Mutual funds are often treated as
short-term investments by investors, and this, together with their conservative
investment policies, means that their fixed income investment tends to be in gilts or
short term bills, rather than corporate debt.
Exchange control rules place an aggregate limit on the amount of investment that
foreigners can put into domestic bonds. As well as excluding a possibly significant
group, which at least might offer a countervailing investment view, foreign investors are
an important catalyst for change and innovation.
Map of countries by foreign currency reserves and gold minus external debt based on 2009 data from CIA Factbook
External Debt - Definition
According to a working group formed by four organizations namely The World Bank, The BIS
(Bank Of International Settlements), The IMF (The International Monetary Fund) and The
OECD Organization For Economic Co-operation And Development External Debt can be
defined as follows - ―Gross External Debt is the amount, at any given time, of disbursed and
outstanding contractual liabilities of residents of a country to non-residents to repay principal,
with or without interest, or to pay interest, with or without principal‖ Gross Debt is the stock of
liabilities, on which debt service is calculated.
Foreign Borrowing allows a country to invest and consume beyond the limits of current
domestic production and, in effect, finance capital formation not only by mobilizing domestic
savings but also by tapping savings from capital surplus countries. Foreign borrowing can
lead to more rapid growth. However, if a country borrows abroad, it must also introduce debt
management as a major policy concern. Inappropriate and excessive foreign borrowing will
generate debt service obligations that will constrain future policy and hence growth. Global
capital markets allow enterprises and governments in capital scarce countries to borrow from
capital-abundant countries, where the market interest rate is lower. World capital markets, in
effect, increase the interest that lenders in the capital-abundant countries can earn and
reduce the interest paid by borrowers in the capital-scarce countries. International lending
can thus, increase economic welfare in both the borrowing and lending countries. For
capital-scarce counties this means expansion of capital formation and higher optimal
borrowing. The objectives of debt management policy are to achieve the benefits of external
finance without creating difficult problems of macroeconomic and balance of payments
Burden of External Debt in India
IT IS A source of some comfort that India's external debt continues to be at a stable level.
According to the latest status paper prepared by the Union Finance Ministry, the stock of
foreign debt stood at $98.4 billion at the end of December 2001. After a substantial increase
of $16 billion between 1991 and 1995, partly on account of fresh loans and partly on account
of exchange rate movements, the total debt has fluctuated between $93 billion and $99
billion since 1995. Going by a number of indicators, India's external debt situation is far
better today than it was during the balance of payments (Bop) crisis of 1991. While the
absolute size of foreign debt is important, more relevant is the weight this debt imposes on
the economy. And, on that count, the burden has become lighter and lighter, even as the
stock of outstanding has remained more or less constant. Annual repayments of loans and
interest as a percentage of current receipts — the debt service ratio, which was as high as
35 per cent in 1990-91, has fallen to 13 per cent today. Debt as a percentage of the gross
domestic product has nearly halved since the early 1990s. And the short-term debt to GDP
ratio, which crossed 10 per cent in 1990-91 and precipitated the Bop crisis of that year, has
been held under 3 per cent. Overall, India is now classified by the World Bank as a "less"
indebted country, which is two rungs below the extreme category of "severely" indebted
countries, which is where Brazil, Argentina and Indonesia now belong. In absolute terms as
well, India's position has improved globally. In the mid-1990s, India was the third largest
debtor in the world; today it is ranked ninth. All this has taken place in spite of the fact that
new loans are increasingly being raised on commercial rather than concessional terms, as
was the practice for decades.
At end-September 2010, India’s external debt stock was US$ 295.8 billion reflecting an
increase of 12.8 per cent over the level of US$ 262.3 billion at end-March 2010. The long-
term debt increased by 9.5 per cent to US$ 229.8 billion, while short-term debt showed an
increase of 25.8 per cent to US$ 66.0 billion. Of the total increase of US$ 33.5 billion in
India’s external debt at end-September 2010, the valuation effect arising from depreciation of
the US dollar against major international currencies accounted for US$ 6.3 billion (18.8 per
cent). Excluding the valuation effect, the increase in external debt would have been US$
Short-term debt accounted for 22.3 per cent of India’s total external debt while the rest 77.7
per cent was long-term debt. Component-wise, the share of commercial borrowings stood
highest at 27.8 per cent followed by NRI deposits (16.9 per cent) and multilateral debt (15.8
Government (Sovereign) external debt was US$ 72.3 billion (24.4 per cent of total external
debt) at end-September 2010 as against US$ 67.1 billion (25.6 per cent) at end-March 2010.
The share of US dollar denominated debt was the highest in external debt stock at 53.9 per
cent at end-September 2010, followed by the Indian rupee (18.8 per cent), Japanese Yen
(11.8 per cent), SDR (9.8 per cent) and Euro (3.6 per cent).
The ratio of short-term external debt to foreign exchange reserves was 22.5 per cent at end-
September 2010 as compared to 18.8 per cent at end-March 2010.
The Department of Economic Affairs, Ministry of Finance has been compiling and releasing
quarterly statistics on India’s External Debt for the quarters ending September and
December every year. This press release relates to India’s external debt at end-September
FUTURE OF DEBT MARKET
The present scenario of debt markets around the world reflects the vulnerability of
government/bond issuer defaults. Though one side of coin throws optimism by way of near
double digit growths in BRIC nations and signs of recovery in developed world the other side
cautions us because of high inflation, corruption in almost all parts of the world and uncertain
crude oil prices.
Factors that would contribute to the development of debt markets
Looking ahead, the resources needed for infrastructure development, the requirement of
mutual fund industry, new pension system and the developing market for securitized
products, rising concerns about the asset liability management on the part of banks/financial
institutions along with the development of derivatives market should see the bond markets
grow exponentially in the future. Some of the developments in each of these areas are
narrated in the following paragraphs.
Infrastructure financing through Debt
The resource requirements for infrastructure development in India are enormous. An
estimate indicates that the requirements are to the tune of US$ 150 billion or more during the
next five years. Considering the long gestation period involved in infrastructure projects and
given their liabilities (mainly deposits) which are short to medium term in nature, banks are
constrained to finance this sector since their asset liability side is short term in nature. This
certainly requires bond financing. There exists a strong case for creation of specialized long
term Debt Funds to cater to the needs of the infrastructure sector. A regulatory and tax
environment that is suitable for attracting investments from Qualified Investment Banks is
key for channelling long term capital into infrastructure development. Currently, most banks
lack in–house capacity to evaluate project finance risk. As such, they provide debt financing
for infrastructure projects largely only to the extent that they are able to participate in loan
syndicates led by a handful of specialists. Facilitating the creation of infrastructure focused
Debt Funds and making it easier for banks to participate in such funds would allow much
larger volumes of debt financing from the banks to be deployed to infrastructure
development while distributing the associated risks more evenly across a greater variety of
Another important and a related issue for the infrastructure financing is the need for a market
in securitized products. In India, the need for asset securitization is being felt in three major
areas - Mortgage Backed Securities (MBS), Infrastructure Sector and other Asset Backed
Securities (ABS). However, there were a number of legal, regulatory, psychological and
other issues, which needed to be sorted out to facilitate the growth of securitization. The
extant law provides for securitization of debt by Asset Reconstruction Companies (ARCs)
and National Housing Bank. However, securitized debts are not included under the
Securities Contract Regulation Act (SCRA) and hence cannot be listed on the stock
exchanges for trading. Secondary market trading is not possible since these instruments are
not listed in the stock exchanges. Recently, the Government has decided to suitably amend
the SCRA to define securitized assets as a security, which can be listed on the stock
exchanges and traded as any other marketable instrument.
Pension Funds and new pension rules
Retirement planning in India is still in its infancy and is quite far away from the level of
sophistication it has seen in most of the developed countries. The Joint family system that is
characteristic of Indian households has been the primary reason behind a laggard retirement
investment structure. However, with the gradual dilution of the joint family system, pension
planning has begun to assume greater importance. The emergence of the Pension fund
industry has certain obvious forward linkages with the capital market of any country. Given
the nature of returns required from pension fund investments, the debt market assumes an
even more important role in assuring fixed returns. In light of this excessive addiction to
safety, most pension funds in India invest heavily in Government securities. Further,
investment restrictions imposed by statutory bodies (statutory bodies only exacerbate
pension fund investment in other sections of the capital market like corporate bonds and
equity). However, due to growing fiscal concerns, Government is favouring defined
contributory schemes. This along with the entry of private pension funds requires other
investment avenues to enhance their risk return universe. This is likely to create greater
demand for corporate bonds.
What needs to be done?
Investor base needs to be broadened
Banks’ investments in corporate bonds need to be encouraged especially by bringing in
changes in the prudential regulatory mechanism which treats loans portfolio on par with
investment portfolio. Currently, the investment portfolio (banks’ investments in corporate
bonds) has to be marked to market whereas the same constraint is not there in the case of a
loan extended to the same corporate. Implementation of Basel II might remove this anomaly
over a period of time. FII’s need to be given higher limits for investments in corporate bonds
since this is one major investor class which can bring volumes to the corporate bond
markets. Some of the foreign funds do feel that, despite the recent hike in the limit up to
which FIIs can invest in corporate bonds (USD 1.5 billion); this amount is too small for taking
any active interest in this market meaningfully. The investment guidelines for the provident
and pension funds need to be rationalized and they should be allowed to invest on the basis
of rating rather than in terms of category of issuers. This may encourage these funds to
invest in high quality corporate bonds. Such a change will also benefit these funds which can
enhance their returns. To encourage small investors, the bond market structure should
emulate the equity market structure in the sense that a retail investor should be able to buy
and sell bonds without any restriction on the minimum market lot. Currently an investor can
buy even one share in the equity market.
Widening the issuer base
There is a need to review the current guidelines for issuance, disclosure and listing of
corporate bonds and they should be made simpler. Currently banks are allowed to issue
bonds of maturities over 5 years only for financing infrastructure sector. Since banks are one
of the leading issuers of bonds, they should be allowed to issue bonds of maturities over 5
years subject to their asset liability matching norms. The development of an interest rate
derivatives markets is a major prerequisite to facilitate this. As has been said earlier, banks
are one of the major issuers of bonds to augment their tier II capital and these bonds are in
turn subscribed to by other banks (cross holdings). Regulatory caps should be fixed for such
cross investments so that other participants are given an opportunity to subscribe to these
Development of derivatives market
Though the interest rate risk is mainly managed through interest rate swaps and forward rate
agreements, the derivatives market for hedging interest rate risk is not fully developed in
India. Further there is also a need for a market for short selling and when issued market for
better price discovery and hedging. The RBI has already initiated certain steps in this
direction but a lot needs to be done in this aspect which only can assure a deep and vibrant
debt market. Allowing repos in corporate bonds is also necessary to improve interest in
Market making should be encouraged for promoting the corporate debt market. This requires
incentivising large financial intermediaries like primary dealers to take up this job. One way is
to encourage the investment bankers involved in the placement of the bonds
Addressing price distorting issues
There is a need to rationalize and reduce the stamp duty. Since stamp duty is a levy by the
State Governments, they have to be taken into confidence to achieve this objective. Stamp
duty also needs to be rationalized with regard to securitized debt. TDS is another issue,
which distorts the pricing of bonds. Like in the case of government securities, TDS needs to
be abolished in the case of corporate bonds. The shut period (for reckoning the registered
owner of the bond for payment of coupons) is very long in the case of corporate bonds and
needs to be brought on par with that for the government securities, which is one day. It is
also necessary to standardize the day count conventions. Currently the day count
conventions in the market differ depending upon the nature of the instruments and the
nature of the transaction.
Listing norms to be eased
For already listed entities, there listing norms should be simpler; they should be allowed an
abridged version of disclosure. On the other hand, unlisted companies issuing bonds to
institutional investors and QIBs, rating should form the basis for placement. However,
companies which are not listed and which are opting for the private placement mode should
be subjected to stringent disclosure norms. Privately placed bonds should be mandatorily
listed within 7 days from the date of allotment, as is the case with public issues. The practice
of suspension of trading/delisting of securities in case of non-compliance with listing norms
by an issuer needs to be replaced by heavy penalties on the promoters and directors of the
erring company. Debenture trusties should be made more responsible and accountable.
They also should ensure that important information such as rating downgrades should be
disseminated to the investors.
Developing a trade reporting system
There is an urgent need to put in place a mechanism that captures all the information
relating to trades in corporate bonds, disseminate the same and keeps a data base of trade
history. Various regulators should direct the regulated entities to report all the transactions
done by them to the trade reporting system.
Trading, clearing and settlement mechanism
For improving the transparency and efficiency to the transactions in corporate bonds,
anonymous screen based order matching trading systems should be encouraged. However,
the authorities should keep in mind that multiple trading platforms also have the potential to
impact the liquidity adversely. Simultaneously, the development of clearing and settlement
mechanisms should be commensurate with IOSCO standards. Novation and multilateral
netting should form the backbone for risk mitigation and enhancement of liquidity.
Specialized debt funds for infrastructure financing
As recommended by the High Level Expert Committee on Corporate Bonds and
Securitization (HLECCBS), there is a case for creation of specialized Debt Funds to cater to
the needs of the infrastructure sector. Such Debt Funds registered with SEBI should be
given the same tax treatment as the one extended to venture capital funds.
Developing a market for debt securitization
Apart from reducing the stamp duty on debt assignments, pass through certificates (PTCs)
and security receipts, the government should also endeavour to resolve the uncertainty in
taxation issues pertaining to securitized paper. With a view to remove any ambiguity in this
regard, the Central Government should consider notifying PTCs and other securities issued
by securitization SPVs / Trust as ―securities‖ under SCRA.
WORLDWIDE SCENARIO OF DEBT MARKETS
Public Debt as a Percentage of GDP World Map 2009/10
The immediate risk facing the world is of sovereign debt defaults. In a Bloomberg survey of
investment professionals, a majority of those surveyed believe that Greece and Ireland will
default on their sovereign obligations sometime this decade. With the exception of war,
sovereign debt (abroad and at home) is the single greatest risk to capital markets. The
problem the world continues to face with this issue is that the fixes so far have been for other
countries to pool their resources and bail out the offenders. But these bailouts are occurring
with borrowed money. So, there is a situation where bailing out poorly managed countries is
being done so by piling debt upon debt without really addressing the other side of the
equation – spending. It’s a real pickle, because no politician wants to tell the people that their
pension benefits are being cut in order to control the deficit. This is an issue that has to be
dealt with this decade, because the risk of not doing so is enormous.
As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated
$82.2 trillion, of which the size of the outstanding U.S. bond market debt was $31.2 trillion
according to BIS (or alternatively $34.3 trillion according to SIFMA - Securities Industries and
Financial Markets Association).
Nearly all of the $822 billion average daily trading volume in the U.S. bond market takes
place between broker-dealers and large institutions in a decentralized, over-the-counter
(OTC) market. However, a small number of bonds, primarily corporate, are listed on
Following is a list of countries by public debt as listed by CIA's World Factbook 2010. It is the
cumulative total of all government borrowings less repayments that are denominated in a
country’s home currency. Public debt should not be confused with external debt, which
reflects the foreign currency liabilities of both the private and public sector and must be
financed out of foreign exchange earnings.
European Debt Crisis
The Greek economy was one of the fastest growing in the Eurozone during the 2000s; from
2000 to 2007 it grew at an annual rate of 4.2% as foreign capital flooded the country. A
strong economy and falling bond yields allowed the government of Greece to run large
structural deficits. According to an editorial published by the Greek newspaper Kathimerini,
large public deficits are one of the features that have marked the Greek social model since
the restoration of democracy in 1974. After the removal of the right leaning military junta, the
government wanted to bring disenfranchised left leaning portions of the population into the
economic mainstream. In order to do so, successive Greek governments have, among other
things, run large deficits to finance public sector jobs, pensions, and other social benefits.
Since 1993 debt to GDP has remained above 100%.
Initially currency devaluation helped finance the borrowing. After the introduction of the euro
in Jan 2001, Greece was initially able to borrow due to the lower interest rates government
bonds could command. The global financial crisis that began in 2008 had a particularly large
effect on Greece. Two of the country's largest industries are tourism and shipping, and both
were badly affected by the downturn with revenues falling 15% in 2009.
To keep within the monetary union guidelines, the government of Greece has been found to
have consistently and deliberately misreported the country's official economic statistics. In
the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other
banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid
the actual level of borrowing. The purpose of these deals made by several subsequent
Greek governments was to enable them to spend beyond their means, while hiding the
actual deficit from the EU overseers. The emphasis on the Greek case has tended to
overshadow similar irregularities, usage of derivatives and "massaging" of statistics (to cope
with monetary union guidelines) that have also been observed in cases of other EU
countries, especially Italy, however Greece was seen as the worst case.
In 2009, the government of George Papandreou revised its deficit from an estimated 6% (8%
if a special tax for building irregularities were not to be applied) to 12.7%. In May 2010, the
Greek government deficit was estimated to be 13.6% which is one of the highest in the world
relative to GDP. Greek government debt was estimated at €216 billion in January 2010.
Accumulated government debt is forecast, according to some estimates, to hit 120% of GDP
in 2010. The Greek government bond market is reliant on foreign investors, with some
estimates suggesting that up to 70% of Greek government bonds are held externally.
Estimated tax evasion costs the Greek government over $20 billion per year. Despite the
crisis, Greek government bond auctions have all been over-subscribed in 2010 (as of 26
January). According to the Financial Times on 25 January 2010, "Investors placed about
€20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the
(Greek) government had reckoned on." In March, again according to the Financial Times,
"Athens sold €5bn (£4.5bn) in 10-year bonds and received orders for three times that