With an investment of one billion euros in government bonds, citizens would earn 370 million

Last year, Croatians deposited an additional 25 billion kuna into bank accounts, increasing savings to 263.4 billion. However, considering that interest rates on savings deposits are a meager 0.3 percent, while inflation is 12 percentage points higher annually, it is easy to calculate that the real value of savings has decreased. As much as 31.6 billion kuna has evaporated in one year.

In light of this data, the recent announcement by Finance Minister Marko Primorac about the issuance of so-called government bonds sounds quite appealing. For example, if citizens invested one billion euros in purchasing ten-year Croatian bonds with a yield of four percent, during that period they would earn 370 million euros more than if that money were kept in the bank. This is merely an illustrative calculation that assumes the state, if it decides to issue government bonds, would offer an additional premium for the inaugural issue to make this debt instrument attractive. Such a move would indeed be expected for a premiere issue.

– Government bonds should offer conditions comparable to the best savings products on the market as they would be their substitute. Experiences from neighboring countries show that successful issues of government bonds were issued with a premium over existing market conditions, offered protection against inflation, and had maturities of up to five years – say representatives from Raiffeisen mandatory pension funds.

In addition to a certain premium, the first government bonds should have a shorter maturity, although it would currently be much more opportune for the state to issue bonds with a longer term.

– About 59 percent of household deposits are locked in for a period shorter than two years. Therefore, it would be wise to initially offer shorter maturities and gradually offer longer ones over time. In neighboring Hungary, government bonds are not traded with a premium yield compared to regular government bonds, but households have the opportunity to invest in a very wide range of instruments regarding maturity and coupon payment forms – noted senior financial analyst at Intercapital Ivan Dražetić, adding that government bonds are best introduced gradually while domestic financial market participants get accustomed to them.

 

—

—

 

In the first trial bond issue, the Czech Ministry of Finance decided in 2011 on maturities of one and five years, and in the second issue offered Czechs one-and-a-half-year discount bonds, five-year coupon bonds, reinvestable savings bonds, and seven-year inflation bonds. The issue was about one percent of the amount of household savings deposits.

– Considering the state of the domestic market, as well as the foreign one, it seems that issuing government bonds under current conditions would be financially favorable for the state. Namely, interest rates on long-term time deposits of the population are currently 0.3 percent, while the costs of long-term state borrowing are generally between two and three percent – believe those at the Croatian National Bank (HNB).

According to surveys conducted by some online portals after the finance minister’s statement about the new financing model, there would be no shortage of citizens willing to invest in government bonds. However, for now, this is only a theoretical possibility that requires elaboration and preparation. If and when the finance minister decides to take this step, alongside the campaign for the issuance of government bonds, efforts should be made to increase the financial literacy of individuals.

– First of all, it is necessary to explain to citizens the risks arising from investing in financial instruments and that such instruments differ from deposits insured by the state, but that they also carry higher returns than insured deposits – emphasized Dražetić.

 

More on the topic of government bonds and the experiences of other countries can be read in the new printed and digital edition of Lider.