Another major change was the orientation of retail domestic investors toward the equity market that was experiencing an unprecedented boom at the time.<sup>21</sup> Retail investors withdrew from the government securities market when the spreads on floating rate bonds were substantially reduced and because of their continuing aversion to investing in fixed-rate longterm instruments. They preferred to place their financial savings in bank deposits and, to a lesser extent, mutual funds. Currency and bank deposits, including repos and bank bonds, which corresponded to 85 percent of GDP in 1985, and had fallen to 67 percent in 1995, rebounded and reached 97 percent in 2000. Floating rate bonds that carried spreads of 20, 40 and 80 basis points for bonds with 3, 5 and 7 year maturities were targeted at domestic institutional investors (Ministry of Finance 2000:29).

|**Table 3.7: Sources of**<br>(percent of total)|**Financing t**<br>1996|**he Public**<br>1997|**Sector Bo**<br>1998|**rrowing R**<br>1999|**equirem**<br>2000 1|**ent, 1996-2000**<br>996-2000|
|---|---|---|---|---|---|---|
|Bank of Greece|-4.8|10.8|11.3|8.1|5.7|4.9|
|Banks: Treasury Bills|15.7|29.7|-28.8|35.2|106.7|28.1|
|Banks: Other Loans|1.3|-0.2|17.9|-9.0|0.4|2.5|
|Non-banks|78.5|5.7|3.2|-117.1|-182.0|-21.6|
|Foreign Investors|9.4|54.1|96.4|182.9|169.1|86.1|
|Total|100.0|100.0|100.0|100.0|100.0|100.0|
|Total in billion GRD|3127.1|2106.5|1935.5|1494.2|1717.0|10380.3|
|Total % of GDP|10.4|6.4|5.4|3.9|4.2||

Source: Bank of Greece, Annual Report for 2001:185 As noted, a major factor explaining the attractiveness of Greek government securities for large international investors was the expectation of very high returns linked to the high nominal yields and the prospect of large capital gains emanating from economic convergence and eventual entry into the euro zone. The yield on 10-year government bonds fell from well over 8 percent in 1997 to 5 percent in 2002. But the many initiatives taken in modernizing the functioning of the government debt market also played a major part.

In the middle of 1995, Greece began to make systematic use of the auction technique for placing Greek government bonds on the primary market (Bank of Greece 1996:31-40). This replaced the older technique of public subscription and avoided the problem of under or oversubscription that could result from the administrative setting of interest rates. The technique of public subscription continued to be used for issues of treasury bills until October 1997, because these instruments were mainly bought by retail investors. After 1997, only savings certificates, targeted and exclusively issued to retail investors, were offered through public subscription.

Another significant innovation was the establishment in May 1995 of a new electronic system for registering and monitoring transactions in government debt securities. This allowed the dematerialization of securities, except those held by retail investors who preferred to hold on to their securities, eliminating the printing, transporting and safekeeping costs of securities issued in physical form, and facilitating the development of the secondary market. The new system was open to international clearing systems (such as Euroclear and Cedel) for their international

> 21 The boom in stock market prices later turned into a bubble that burst in 2000 like those of most other countries.

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