In 1938, the value of municipal bonds issues traded at the Bucharest Exchange amounted to 4% of the GDP. Currently, it is less than 1%.
Nevertheless, when it comes to small volumes we should not blame the municipal bonds. For the notion of yield curve to be more than a mere mathematical extrapolation, consistent issuances of sovereign bonds are necessary; i.e. bonds with maturity periods over 10 years – the proper bonds, because the other are T-bills or T-notes. What’s happening? Does volatile taxation hinder the issuance of long-term bills in lei?
We keep returning to the interwar, capitalist Romania. The bonds issued by municipalities of Bucharest, Braila, Craiova, Iasi or Ploiesti had maturities of 40-50 years. And there were several issues of bearer bonds – traded on the Exchange, of course: Bucharest – 4.5% of 1895 and 1898, 4% – 1903, 1906, 1909 and 1912, 5% – 1910 (two), 3.5% – 1921, also 7% of 1921 in French francs – backed by all the net revenues of the General Company of Gas and Electricity; Baăila – 4.5% of 1912 and 1915; Buzau – 5% of 1910; Craiova – 5% of 1906, 1910, 1911 and 4% of 1912; Iasi – 4.5% of 1906 and 1910; Ploiesti – 5% of 1906 and 1910; Turnu Severin – 4.5% of 1913. The money was used to build covered markets, squares, roads, parks, tramways, sewerage, to supply water. It all went through reputable banks such as Marmorosch, Blank & Co, Romanian Credit Bank, Romanian General Bank, Agricultural Bank, Berliner Handelsgesellschaft, Deutsche Bank or Credit Suisse.
Actually, the government bonds were the stars, but the corporate and municipal bonds had a major impact on the yield curve. In other words, Bucharest, where the unemployment is low and the business environment is better, although not able today to borrow cheaper than the country, can improve the yield curve and the sovereign credit rating when it issues big volumes of bonds.
This raises interest for and trust in Romania as a whole. Significantly, in 1938, bonds from ten issues by the municipality of Bucharest were traded on the Exchange. Because clearly – just like the investors, then the financiers in U.S. are attracted by busy areas near the Great Lakes – the investors and financiers are looking for the busy areas in Romania. During the interwar, other communes were chosen either for their position or for their consumption capacity. These are the considerations to be used for regionalization; drawing in investors with interesting things, not catering to the interests of local barons. Because the latter are the ones who make Romania more feudal than capitalist, and it’s because of them that such notions as exchange, bonds, yields are seldom discussed.
So, in order for the municipal bonds to provide depth to the yield curve, the issuing municipalities must ask for ratings. And no issue has such features, except Bucharest bonds, which were not launched and traded on the Romanian market. The, as the interests drop, the municipal bonds could compete with the bank deposits, as they are fixed income instruments. Sadly, this is just a way of speaking, as they do not provide fixed interests of 4-5% like in the interwar, to provide a benchmark, instead, the investors get variable yields linked to the ROBOR. Thus, instead of competing against the banking market, they follow it.
We must mention that the interwar municipal bonds were accepted for Lombard credit, to the difference of the present ones, which are neither saving instruments, nor refinancing ones.