(Bloomberg) -- One of Europe’s longest-serving sovereign debt management chiefs has cut borrowing costs even as his nation went through unprecedented upheaval, including an assassination attempt on the prime minister, a budget blowout and a credit-rating downgrade.
Slovakia’s Daniel Bytcanek said his recipe is transparency in dealing with investors, selling to a wide array of mainly buy-and-hold asset managers and the financial security blanket that comes with the country’s membership in the euro area.
It appears to be working as the extra yield bondholders demand to hold the 10-year notes Bytcanek issues over German bunds dropped to 115 basis points from about 130 a year ago. For borrowing costs to drop further, Slovak policymakers must cut one of the European Union’s widest budget deficits, he said in an interview in Bratislava.
A key lesson learned by the small open economy during the global financial crisis was to diversify its investor base as much as possible, he said. In response, his debt management agency, known as Ardal, began selling securities to a larger number of investors, rather than relying on a more select group of bondholders amassing larger portions of the debt.
“We’ve moved from traditional banks to insurers, fund managers, asset managers, pension funds and individual investors,” Slovakia’s debt tsar for the last 21 years told Bloomberg News. “Today, there’s a clear dominance of investors like funds and buy-and-hold asset managers, which benefits us as debt managers in these turbulent times.”
With a staff of fewer than 20 — including back-office personnel and an IT engineer — Ardal oversees about €70 billion ($77.9 billion) of outstanding debt and a €20 billion state treasury system. By combining state debt and budget liquidity roles, the agency is more flexible, according to Bytcanek.
One way to measure the debt agency’s success is the effective cost of funding — representing the average interest costs on the entire portfolio managed by Ardal, including older liabilities. It stood at 1.85% per annum last year, a touch above the 1.79% for neighboring Austria, which has a higher credit rating, according to Bytcanek. Slovakia has covered its funding needs for this year, which makes it well-positioned to weather potential market turbulence during US elections in November, he said.
Ardal has sold €9.9 billion of securities at an average yield of 3.62% this year, 12 basis points lower than in 2023, front-loading the issuance in a bet — which is proving a winner — that that the European Central Bank will cut interest rates at a slower pace than the market had generally anticipated at the start of the year.
The country plans to hold three more auctions this year, plus a syndicated sale of around €1-1.5 billion, which would bring the total issuance to around €12.5 billion. The extra funds will be used to cover the first quarter of next year, when the agency will focus on a retail bond sales to citizens.
“Our strategy is to maintain a larger cash reserve, so that if volatility rises, we won’t be forced to go to the market under non-standard conditions or at any cost,” he said. Next year’s issuance should also be around €13 billion, according to Bytcanek.
Slovakia managed to dodge the negative impact of a downgrade from Fitch Ratings in December, but the move served as a warning that future funding costs will depend on the country’s ability to narrow its budget gap. The government is expected to present a deficit-reduction plan next month after the Finance Ministry has pledged a €1.4 billion package of measures.
“Slovakia’s bond premium is waiting for budget consolidation,” Bytcanek said. “The spreads could decrease if a credible plan comes soon.”
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