KARACHI: Pakistan has invited local and international banks to submit proposals for management of a sovereign bond issue, but the deal could struggle because of the country’s volatile politics and a global credit crunch.

A senior finance ministry official said on Monday the sale would happen before the end of the fiscal year on June 30 but no decision had been taken on the exact timing, size and nature of the issue.

“We have started the process, and have invited around 10 institutions to submit their proposals for the planned issue,” Ashfaque Hasan Khan, special secretary at the Finance Ministry, told Reuters.

“We will see the market conditions and then decide when and what to do,” he said. Pakistan’s sovereign bond spreads have widened since the country’s opposition leader Benazir Bhutto was martyred in late December, with civil unrest continuing ahead of parliamentary and provincial assembly elections on Feb 18.

The country’s five-year credit default swaps, or insurance-like contracts that protect against defaults or restructuring, last saw a quote of 450/550 basis points on Feb 1. That would mean investors would spend between $450,000 and $550,000 a year to insure $10 million worth of underlying Pakistani debt.

“If they did an issue, it wouldn’t go down very well with the investor base,” said Dilip Shahani, head of Asian fixed income credit research at HSBC. “The market sentiment is quite poor and they would have to pay a lot,” he added.

Pakistan last ventured into the international capital market in May 2007, when it sold $750 million worth of 10-year bonds in a deal that was seven times oversubscribed with a total demand of $3.5 billion.

That deal was managed by Citigroup, HSBC and Deutsche Bank. But markets in the region have since been hit hard by a credit squeeze and US subprime related losses at global financial firms in the second half of 2007, and more recently, by worries about a recession in the United States.

The widely-followed iTRAXX Asia ex-Japan high-yield index, an important indicator of risk aversion, widened as much as 547 basis points (bps) on Monday, just below the record 550 bps hit on Jan 23, according to one trader.

That has made issuers more reluctant to sell bonds to overseas investors as they have had to pay sizeable premiums to attract investors. The Philippines and Indonesia have been the only sovereign bond issuers so far this year, in deals worth a combined $2.5 billion.

Vietnam has said it will sell about $1 billion in bonds this year, in a deal that is being highly anticipated in the markets as the country’s last bond sale was in October 2005. “In terms of sovereigns, I guess it’d be much better if Vietnam can come first,” said a fund manager in Hong Kong.