Was Belgium’s record €22 billion retail bond buy a one-off?

Last year the Belgian government set a new record by selling debt direct to its citizens. All eyes are on what happens when it matures next week.

Indebted governments endlessly worry about how they’ll fund their deficits – usually done by selling bonds to big banks or pension funds.  
Last September, Belgium broke all records when it took an innovative path, selling €22 billion in government debt, not to financial institutions, but to its own citizens.  
The government estimates getting household savers to buy direct could have saved it hundreds of millions of euros.
The twelve-month issue expires next Wednesday (4 September), and there’s a big question about what happens next: was that success a one-off?
The relatively short term on the one-year bond, combined with an attractive 3.3% return, made it a hit with Belgian savers, Jean Deboutte of the Belgian Debt Agency told Euronews.
The amount they invested – equivalent to 3.7% of Belgium’s GDP – far surpassed the government’s internal estimates, with the finance ministry processing a transaction every three seconds, and the biggest spenders splurging millions.
“The whole world was completely shocked by the success,” said Deboutte, who’s director for strategy, risk management and investor relations at the government agency.  
“Imagine putting €5 million on the state note electronically … it’s impressive, isn’t it? That happened,” he said.
“I had to tell the whole story to the Reserve Bank of India in Mumbai: ‘Tell us how you do that’,” he added, also citing interest from China, the US and South Korea.
Over 230,000 investors – around 5% of Belgian households – chose to buy directly from the government rather than via their usual finance provider, and the whole exercise gained €150-200 million for the public coffers, thanks to tax revenues and lower costs, Deboutte estimates.
The issuance certainly came at a sweet spot: after years of near-zero interest, commercial banks had been slow to pass on rate hikes to savers, making the government bonds unusually attractive. 
For the next round, due to begin on 16 September, Deboutte concedes he may not be so lucky – the interest rate, set to be announced on Tuesday, will likely be lower. 
He’s heartened by a recent poll carried out by AG Insurance, which suggested half of last year’s investors are planning to renew, but he admits savers might think again when faced with a less favourable deal.
Banks seem to agree, and complain the success was due to unfair play. 
The volume of sales “can be explained because the state was giving an enormous tax advantage,” a spokesperson for Belgian banking lobby group Febelfin told Euronews; the temporary rate cut from 30% to 15% hasn’t been renewed this time.
In future, issuance should “always happen on a level playing field with other retail bonds from non-governmental issuers,” the spokesperson added, also citing differences in anti-money laundering and market-trading rules.
But Deboutte points out that his state bond still just took 5% of household banking deposits, and suggested banks had only themselves to blame for having customers poached by the government.
“If these are the conditions that are offered to your clients who have been loyal to you for ten, 20, 30 years … that was a clear risk,” he said, adding: “It was the government came on the market, but next time it may be Google or Apple.”
Banks are now having to fight for their share of the returning €22 billion: a welcome boost in a market which, according to Belgium’s competition authority, effectively acts as an oligopoly.
“The situation of competition among banks is better” thanks to the state bond, Nicolas Claeys , a specialist in savings products at consumer interest group Test Achats, told Euronews.
But the job of reforming the banking market isn’t yet over, he says; he favours further measures to make it easier to switch accounts.
The EU has been keen to encourage cautious Europeans to venture further into capital market investment – and the Belgian example may contain some wider lessons, Claeys believes.
“What we saw, to encourage people to invest more broadly out of their comfort zone, is the need to propose something relatively simple, and easily accessible,” he said.
Even if the retail bond’s popularity dips, the “product will not disappear,” Deboutte said – and he’s already thinking of ways to modernise it.
He cites Austria, which offers retail bonds every day on tap, as well as a green version where money invested is channelled into environment projects; Italy’s inflation protection guarantees are also popular, he notes.
But ultimately, he doesn’t intend to lose any sleep if the 16 September bond issue proves a flop – saying there are other, more traditional options to fund the public deficit.
“It’s a very flexible market, hugely liquid,” he said.