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MARKET BACKGROUND
Finnish financial markets developed relatively rapidly in the 1980s. Effectively, however, the money market has been the main area to change, with banks having started to issue CDs as a result of financial market liberalization. In the beginning of the 1990s, the Finnish economy went into the worst recession in the post-war period. GDP stagnated in 1990 and then fell for the next three years. As a result of the recession, the budget deficit and the government's borrowing requirement widened sharply. The stock of government bonds outstanding in the domestic market has grown very rapidly over the last few years, and only recently has a liquid and well-functioning bond market emerged. The market now offers a diverse range of instruments, based upon a series of government benchmark bonds. Other bonds in the market trade at a spread above government bonds.
MARKET STRUCTURE
Over the last couple of years the outstanding stock of markka-denominated bonds has grown remarkably. Even so, the outstanding markka bond market remains small as a share of GDP, reaching 40.3% in 1993. At the end of 1993, all outstanding bonds amounted to Fmk190.0 billion in nominal terms.
Finnish institutions have been allowed to issue markka-denominated bonds abroad since February 1990. The restriction on sales of bonds listed on the Helsinki Stock Exchange abroad was lifted in January 1991.
In 1993, approximately 63% of domestic bonds were issued by the government or local government authorities. Financial institutions, including finance companies, banks, mortgage institutions and Finnish Export Credit, accounted for roughly 40% of the market in terms of outstanding bonds, and 19% in terms of new issues. Activity in the corporate and municipal bonds sector increased sharply in 1993. The volume of new issues in the sector was approximately the same as for financial institutions, whereas there are only around half the amount of corporate and municipal bonds outstanding.
Bond market turnover has increased steadily since the mid-1980s. However, turnover rose dramatically from Fmk33.8 billion in 1991 to Fmk92.2 billion and Fmk347.2 billion in 1992 and 1993 respectively. In 1993, approximately Fmk256 billion of the total turnover was in benchmark bonds.
Government bonds
Government and housing bonds form the basis of the Finnish bond market. Trading in these bonds is dominated by...