Albania’s Eurobond Januar 2014

Albania issued the first Eurobond in international markets on November 4th of 2010. A Eurobond is a bond issued in international markets (not locally) with a maturity of 1 year or more. At the announcement the bond had a 7.625% yield. This instrument is comparable to other government bonds already issued by Albania, but it: (i) is exclusively traded in foreign international markets and (ii) is issued in Euro.

Since the yield moves in the opposite side of price, for the bondholder it is always better when yields decrease, so that he can generate a profit in case he sells the bond. The same rule applies for the issuer, because the lower the yield, the lower the potential cost in case he decides to refinance.

The following graph presents the historic performance of the Eurobond for the period 2010-2014 (bid yield):

^{Source: Ministry of Finance, Bloomberg
Comments and analysis: ODA}

Since its issue in 2010, the yield of the bond has increased in the period of September-December 2011 during the Eurozone crises, which lowered the demand for high risk, lower rated government bonds. During that period the yield reached a peak of 11.975%. In that moment, had the Albanian government decided to refinance its debt in Euro, the bond coupon would have been approximately 12%.

After December 2011, the yield has decreased reaching a low of 4.68% during January  2014. This decrease is not a result of a better macroeconomic environment in Albania, but a result of a general market optimism for the government debt of Eurozone peripheral countries after the ECB intervention. This has had a very positive impact on the bonds performance and actually the Albanian government would have a lower cost of refinancing in Euro compared to the initial issue.

The issue of debt in international bond markets may be profitable because the cost of debt may decrease from a wider investor base, but on the other hand may expose the country’s debt to crisis contagion from other countries and from the overreaction of the international bonds and stocks markets.