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Euro zone governments suffer more bond dealer exits

[LONDON] Two banks have ceased acting as primary dealers in certain euro zone government bond markets this year, the trade association AFME revealed on Thursday, while there was confusion over Santander's role as a market maker in Portuguese bonds.

The moves are part of a trend that threatens to increase liquidity constraints in government bond markets and could eventually make it more expensive for countries to borrow.

The latest edition of AFME's European Primary Dealers Handbook showed that ING dropped out of Greece and Scotiabank quit France earlier this year, moves that were verified by Reuters with sources at the banks.

The publication also showed that Santander is no longer a primary dealer in Portuguese government bonds. The Portuguese debt agency confirmed this, adding that Santander remains an auction participant but will not have to fulfil all the obligations of being a primary dealer.

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But a spokesman for Santander - which ceased being a primary dealer in French government bonds last year - told Reuters by email on Wednesday that it remained a primary dealer in Portugal. He did not respond to further requests for comment.

AFME's handbook also showed one addition to primary dealer lists, in the shape of Germany's Landesbank Baden-Wuerttemberg for Austria. However, like most other countries, Austria has fewer dealers than it had five years ago.

Primary dealers are appointed by government debt management agencies to buy government bonds directly from them and sell the debt on to investors in secondary markets.

They are typically also entrusted with maintaining secondary trading activity and liquidity, which entails holding a portion of the government bonds on their balance sheets for a period.

But with regulators keen for banks to reduce the size of their balance sheets, many have decided this activity is not worth the cost.

"We've seen certain banks reviewing their participation as primary dealers in the government bonds market over the past five years and the overall trend shows a decrease in the average number of primary dealers in European countries," said Victoria Webster, director of fixed income at AFME.

"This is also, in part, a result of DMOs (debt management offices) reassessing their optimum number of primary dealers in the relevant countries." Credit Agricole's investment banking arm said in January it had ceased acting as a primary dealer in government bonds in Austria and Ireland, and in treasury bills in the Netherlands.