PUBLIC TREASURY IN THE CONTEXT OF
GLOBALIZED FINANCIAL MARKETS
DragoşIlie
Spiru Haret University, Faculty of Financial Accounting Management Craiova St. Brazda lui Novac, no.4, phone 0723151068, dragosilie2002@yahoo.com
Abstract
In the development and functioning process of the economy, the financing of current and investment activities is a key factor, the mobilization of necessary funds being possible by the existence of financial markets. In the financial markets, public treasury plays a key role. The economic crisis has left economies without cash and the banking system was unable to secure, through the mechanism of credit, the necessary resources for the normal functioning of economy. In these circumstances the Public Treasury must take seriously into consideration, as an option for the future, the development of banking operations and to attract available state funds on the financial markets.
Keywords:state treasury, financial markets, government securities, public debt
1. Introduction
One of the most important directions of the current strategy in Romania is the consolidation of financial markets. Financial markets constitute simultaneously both an economic policy objective and a means to achieve other objectives: capitalization, macroeconomic stabilization, development, modernization, structural transformations (Vosganian, 1999).
Legal documents regarding the financial field, market operators and the international context are coordinated under which the Romanian financial market structure can be addressed as follows: "The financial market, defined as all relationships and mechanisms for efficient resource allocation of money in the economy, comprises the monetary market and capital markets (securities market)” (Pîrvu, 2001).
To finance current activities, we most commonly address the money market via short-term credits. This type of financing is used to cover the gap that exists between the outgoing and incoming current activity but also for the purchase of merchandise, raw materials etc. when the purchasing and selling market offers attractive conditions (Ilie, 2005).
To finance the investment activity, for the establishment and increase of capital, the capital market provides the most appropriate financial instruments.
cover unforeseen needs. Also on the secondary market financial instruments can be transformed into capital, instruments which have been originally acquired in order to protect the equity issuers. For example treasured actions are actions which are bought by the issuing company on the market like any other investor in order to sell them when their price increases or to protect certain interests in the capital market such as merger or hostile takeover.
2. Public Treasury in the financial market structures
State Treasury was established under the Accounting Law no. 82/24.12.1991 and Government Decision no. 78/15.02.1992 on the organization and functioning of public finances. This stipulated that since 1992 the Ministry of Economy and Finances will organize the central treasury of public finances, and treasuries in the general directorates of public finances, financial administration, urban tax districts and rural perceptions.
Government Decision no. 78/15.02.1992 provided that public finance treasury will ensure:
- the execution of state budget, state social insurance budget and local budgets, by collecting budget revenues based on a strict accounting for each payer, that result in payment obligations, amounts received and the remaining flows, ensuring the financing of budgetary expenditures in the limit of budgetary credits and destination set, thus framing in the balance provided by law;
- management of extrabudgetary funds and special funds through separate accounts, on institutions and resource categories;
- internal and external public debt management by tracking the receipt of domestic and foreign government loans, their use according to the destination specified in the contract, the reimbursement rate to maturity, and the interest thereon;
- creation of demand and term deposits of individuals and legal entities; - investments on terms of availabilities deployed in treasury accounts;
- performing other operations in the accounts of central state administration bodies. The current legislative framework governing the activities in these markets is based on two fundamental laws, namely: law on the capital market and banking law.
Even if the banks privatization started harder, the start of their operation on a centralized basis made that the money market would react first to the new demands of the economy. To also boost on the capital markets, the banking law stipulated that banks can carry out activities under the legislation on securities and stock exchanges through separate companies, specific to the capital market, which will operate under the regulation and supervision of the National Securities Commission with except for activities that can be performed directly by banks.
The functioning of the financial market would not be possible without the existence of financial and credit institutions, the State Treasury, which not only set in motion the market but has a crucial role in the capitalization of the economy.
banks and the Treasury actually contribute to the financing and capitalization of both the depositors and the applicants. For depositors, capitalization can be achieved through effective protection of the capital available (compared to inflation, currency risk, etc.) and their increase, faster than inflation and for applicants, by financing investment projects or to cover short term deficits. In these circumstances, the State Treasury and banks have emerged as very dynamic money market institutions, with a very strong influence on the society.
The tendency of generalizing functions of banks and the Treasury will have positive implications on financial markets by strengthening and increasing their liquidity. Following this trend, our country's laws allow for operations becoming more diverse.
“The nature of banking has changed enormously in recent decades. Technological advances have made the economic interdependencies, economies of scale and speed of financial transactions to reach such high levels that it is increasingly felt the need to quit the old geographical limitation (in favor of inter-country banking organizations in Europe, or of interstate banking organizations in the U.S.) which led to increased banking organizations. Governments that realize that the financial globalization sector affect the market have, theoretically, two ways to react. The first is a strong integration of this sector in an international market by attracting foreign investors. The other possible response to this challenge is of defensive nature: an attempt to build banking organizations <in national property> (not necessarily owned by the state) that could compete with foreign competitors in the local market” (Dănilă, 2000).
The globalization of the financial and banking sector has implications for financial markets in Romania, 2009 credit quality being strongly deteriorated (Cuzman et al., 2010).
Coordination of monetary and credit activities in the economy falls in the responsibility of the National Bank whose main purpose is to maintain national currency stability and ensuring the functioning of the entire financial banking system. Through the issuance of currency and putting it in circulation in the form of bank bills and coins, the National Bank contributes decisively to ensure adequate liquidity in the money market, facilitating the management of each bank treasuries. Discounting bills has the same implications for the money market, as presented by the banks and by granting short-term loans to them. Through the monetary policy promoted, the National Bank may restrict or increase the money supply in circulation and credit weight in the economy with major implications on the entire Romanian society.
between depositors, applicants, issuers and investors according to demand and supply.
3. Instruments used by the Public Treasury in attracting funds from financial markets - government securities
Government securities are the documents that certify the public debt in the form of bonds, treasury bills or other financial instruments, representing the state loans in local currency or foreign currency, on the short, medium and long term. These may be issued in the form of materialized or dematerialized form, registered or to bearer, and can be negotiable or non-negotiable;
Government bond with interest is the bond which has a nominal value on which interest is paid on a specified set date.
Capital for interest-bearing government securities is the amount borrowed from the one offering the loan, on the date of issue of interest-bearing securities.
The yield (R) of government securities with interest is calculated using the relationship:
Nz Rd VN
R= × ×
360 Where:
VN = nominal value of government securities Rd = interest rate
Nz = number of days
The interest rate is the interest expressed in percentage, paid for a loan or capital as an interest-bearing state.
Variable interest rate is the interest rate of interest-bearing government bond, which changes from time to time in accordance with an index, a formula or other criteria, as stipulated in the terms of the loan or government bond.
Government bond at a discount is the state bond without interest, which is sold at a lower value than its nominal value.
Capital for government securities at a discount is the amount borrowed from the one offering the loan at the date of the issuance of government securities at a discount, at the amount representing the purchase price of government securities at a discount.
The yield (R) of government securities at a discount is calculated using the relationship:
100
× − =
PA PA VN R
Where:
VN = nominal value of government securities PA = purchase price of government securities
The nominal value of a government bond is the amount that appears on a government bond, repayable at maturity.
Advance redemption date is the date fixed for redemption of a government bond, prior to its maturity, which is communicated by the issuer or by the agent appointed by the Ministry of Finances and for which the government bond holder can receive before maturity, the value for that bond, in accordance with the clauses stipulated in the act of issue of the state loan.
Current Registration Date is the date established by the National Bank of Romania or any other agent authorized, as the last date listed in the registration account and used to identify which government bond holder shall be paid the nominal amount due or related interest, which becomes due to the deadline established by the act of issue of the state loan.
Government securities can be issued:
a) in materialized form, as printed documents, including particulars relating to the issuer, the nominal value, the interest rate, maturity, mode of transmission and other factors specific to each category of securities;
b) in dematerialized form, as securities for which the issue, transmission and probation of the rights incorporated are distinguished by subscription in the account registration system.
Dematerialized government securities and those issued in materialized form are negotiable instruments.
The Ministry of Finance develops regulations that lay down the rules for government securities and must include, in particular but not exclusively, rules regarding:
a) issuance of government securities in materialized form or by account registration and under the conditions of issue;
b) nominal value, interest rates, premiums, maturities, redemptions and payments; c) tender procedures, conditions and methods of selling government securities; d) registration and administration of government securities.
Payment of interest and capital of securities, issued in materialized form, is made in accordance with the legal provisions on such debt securities and under the provisions of regulations issued.
Payment of capital and interest on dematerialized government securities is done through the account registration, in accordance with the regulations issued in terms of legal provisions.
Government securities denominated in national currency can be issued on the short, medium or long term. Short-term government securities are treasury bills and treasury certificates, interest bearing or at discount, and other tools that can be created by the issuer under the law.
Government securities on the medium or long term are bonds with a maturity of over one year and not more than five years from issue, namely over 5 years from issue, either interest bearing or discounted, issued under the terms of the state loan.
Government securities will be offered for sale under the condition that the offer includes at least the following elements:
b) the state loan as represented by related securities - at a discount or interest bearing;
c) interest rate, method of calculation and the dates on which interest is paid, if any;
d) maturity date and the clause of advance repayment, if necessary.
There are forbidden any agreements or concerted practices of the government securities market participants, which have as their object or may have the effect of distortions on market competition, especially those on:
a) government securities yield and price; b) volume of securities offered or requested;
c) securities portfolio structure of each market participant and the portfolio management strategy;
d) involvement in transactions that could constitute acts of unfair competition from other market participants.
“The primary market for government securities includes all operations related to the first sale of government securities in order to attract the short, medium or long term financial capital available” (Moşteanu, 2004).
The participants of the primary market are the state, intermediaries and individuals or legal persons who can perform operations with securities.
Those who deal with public debt must ensure that their policies are appropriate for the development of the government securities market (Mladen and Manolescu, 2007)
Arrangements for placing government securities on the primary market: a) Public subscription. In it, those who wish to purchase government securities shall submit purchase bids at the intermediary designated by the Ministry of Finances (State treasury or commercial banks).
Bids cannot be withdrawn, as they constitute a firm commitment from participants.
If applications exceed the value of government securities, subscription shall be closed at the end of the day in which the value of applications exceeds the amount issued. All applications are accepted in proportion and / or the issue is increased with the agreement of the Ministry of Finance.
The guaranteed public subscription of government securities is made by market intermediaries who guarantee the placement of the full amount of securities, and they assume the obligation to buy, on their own, government securities that are not placed by customers and on the market.
b) Auction. Selling by auction is made by the National Bank of Romania that centralizes bids. They can be:
- competitive bidding, in which case together with the value of securities there is also mentioned a maximum price that the tenderer is willing to pay;
- non-competitive bidding, in which case do not indicate any price and have priority over the first.
Securities transactions are conducted on the principle "delivery versus payment" as (Moşteanu, 2004):
- the purchase of government securities is settled by crediting the account of government securities while debiting the availability account;
- the sale of government securities is settled by debiting the securities account while crediting the availability account.
The margin between selling and the purchase prices is freely determined by the supply and demand report on the secondary market for government securities.
Depending on the settlement date, transactions in the secondary market for government securities may be:
- today–transactions are settled at closing date
- tomorrow–transactions are settled on the first working day after the trade date - spot–two business days from the date of closing the transaction
- forward–another working day following the spot settlement.
Benchmark government securities are financial instruments on the medium and long term that can be issued in order to finance and refinance the public debt. Among others, the benchmark government securities have the following characteristics:
- coupon rate is fixed before launch, being mentioned in the prospectus; - the issue date is the date of settlement of benchmark government securities; - allow reopenings, with the same features as the original issue;
- the coupon is paid annually, the date of the coupon being a standard date set by its prospectus.
State Treasury represents a trustworthy institution for state authorities, forced to face at any time, the needs of funds established by the budget law (Vlaicu, 2008).
4. Conclusions
Risk arising from trading financial instruments is greater in the case of the capital market. But if the risk is greater, then the results may be higher and vice versa. Given this fundamental relation that exists between risk and its results we conclude that the economic processes that rely mainly on funding from capital markets may be more rapid and may have positive results in short intervals.
Government securities market remains an extremely effective solution for raising funds on financial markets; in this case, Public Treasury has a particularly important role.
Bibliography
Cuzman I., Farcas P., Manate D., Manate D., Aspecte ale impactului crizei creditelor sub-prime asupra României, Studia Universitatis, Vasile Goldiş, Arad, Series Economic Sciences, 20/2010, vol. I, p.265;
Moşteanu T., 2004, Buget şi trezorerie publică, Universitara Publishing House, Bucharest;
Pîrvu G., 2001, Economie, Universitaria Craiova Publishing House, Craiova;
Vlaicu N., Aspecte privind atribuţiile Trezoreriei Statului, Studia Universitatis, Vasile Goldiş, Arad, Series Economic Sciences, 18/2008, vol. II, p.58;
