Italy only authorized primary dealer can bid france

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Italy: only authorized primary dealer can bid France, Italy UK recently developed primary dealer system US has auction system. Some countries have syndicate. It is like using underwriter. Even in U.S. with a large issue, there is a syndicate led by a lead underwriter.
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Does it make sense for government to use underwriter? What does underwriter do for you? Underwriter prices it for you. o Pricing an issue of government securities – do you need help with this? No. There are many issues already outstanding, compare to them also look at yield curve and just check based on that. Underwriter also buys entire issue. Benefit to government is that risk is passed on. Should Government buy insurance? No. the risk is small compared to the deficit already being run. ii. What different methods are used to prevent a squeeze? The US has a rule saying that no more than 35% of a given security issue can be sold to one bidder in an auction! British has a similar rule, but it’s more laidback – can issue more of given security France and Italy has more bonds that are interchangeable, so trying to buy all the issues in each auction is dumb. iii. How do secondary markets overseas differ from our own? US market is more open and transparent than those overseas. Overseas governments (like Germany and Belgium) used to dislike when bonds were traded on the secondary market – penalty if securities appeared on 2 nd market too soon. o So, these markets are still developing and dealers are newer. There is no standardized posting of given bid and ask prices of gov. securities. some restrictions on repos in other countries (Germany, uk) Markets are changing now because foreign investors care about liquidity because of exchange rate risk Practices are changing in many countries towards the U.S. model. iv. How does the need for an active and liquid secondary market depend on the type of investor and on the stability of the environment? In a stable, predictable economy: people will not need and active and liquid secondary market. They’ll likely only buy bonds if they’re going to hold until maturity. In a booming economy: people may want to earn money on their money in the short term but they will want to be able to liquidate in the case of new investment opportunities. ALSO: remember that in a deficit, governments will issue more bonds, probably leading to a more active (and therefore liquid) secondary market. v. What are the advantage to the government and to the economy of having such a market?
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Liquid secondary market makes securities more attractive to investors, increasing demand and increasing prices Higher prices mean yield is lower, so cost of borrowing is lower to government Investors want to be able to cash out and trade their securities if needed D. Read “Salomon Sees Profit in Reassembling Split-Up Treasury’s” (Item 12.3). Explain carefully what Salomon is doing and why it is doing it.
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