Inflated expectations?

Inflation bonds are the current vogue product for sovereign debt management. With more countries looking to enter the market, banks are keen to exploit a lucrative business source. But do inflation bonds really offer sovereigns the promised benefits?

European sovereign inflation-linked bond issuance has grown from e20 billion in 1994 to around e200 billion at end-2003. The rate of growth is likely to continue as newer participants join the market. Both Italy and Greece have issued European inflation-linked debt in the past two years, and last month Germany said it was looking to gain parliamentary approval for such issuance.

The forerunners in this field are the UK, which began a successful inflation-linked issuance programme in 1981, and