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- Interest rates could range from three to four percent for three years
- Institutional investors do not want to buy government bonds at the price the state is able to pay
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Details are not yet known, but since last autumn, there has been increased talk about issuing government bonds. The Ministry of Finance has now provided official confirmation for this – the Ministry of Finance is preparing to issue bonds with placement in the Croatian market, in which it will introduce a retail sector participation modality in the primary phase of the issuance, alongside the existing institutional form of placement. They add that coordination with relevant participants is ongoing and a presentation of the planned issuance conditions is expected soon.
In April, it is likely that around 200 to 300 million euros will be issued, intended for ordinary citizens. The timing is not surprising, as an international bond of one and a half billion dollars, issued ten years ago with an interest rate of 5.5 percent, is maturing in April.
At this moment, it is difficult to predict what the interest rate on the international market might be in three months, but market insiders say it would certainly be around six to seven, maybe even eight percent! This is on average about 30 percent more expensive than the original debt, so it is clearly an excellent timing for the government to offer bonds to its citizens. Insiders say that interest rates could range from three to four percent for three years. This is expensive compared to pre-crisis borrowing, but the refinancing cost will still be lower.
The Ministry does not want to provide more information for now. Part of the public and analysts welcomed the announcement with approval, claiming that it in no way indicates weakness in state finances. Regarding the rumors about this last September, Finance Minister Marko Primorac stated that it ‘in no way serves to fill the state budget, nor is it threatened, nor do we have liquidity problems, but anticipating certain movements, if there is a significant increase in interest rates, given that citizens have quite large amounts of deposits in bank accounts on which they receive very low interest rates, it seemed to me a convenient solution to actually allow citizens to participate more dominantly in this form of financing and achieving certain returns and capital on their financial assets’.
Why don’t banks want them?
Traders in financial markets, however, see events somewhat deeper than ordinary mortals, and one of them, Neven Vidaković, reads extremely bad signs from the announcement of such bonds.
– I have a few questions. At what interest rate will they be issued? Why will it be higher than those on Italian bonds? If this is a great idea, why haven’t domestic banks, which are full of liquidity surpluses, jumped at the bonds? If this is great, why don’t international banks buy them? Why are interest rates rising when the minister assured that they would fall with the introduction of the euro? Why doesn’t the minister say he was wrong when he said that the euro would reduce our interest rates, that it would bring economic growth, that it would protect us from recession and reduce inflation?
No institutional investors want to buy government bonds, more precisely, not at the price the state is able to pay. And when the state cannot access money, we have a sovereign debt crisis. Things are not good at all, not just for us but for all bonds of member states, whose interest rates could rise by 0.5 percentage points after the ECB meeting tomorrow. The EU is facing significant economic problems because this inflation is neither a monetary nor a fiscal phenomenon; it reflects the structure of an economy that has become inflationary.
When we are in structural inflation, classical economic policies can only further destabilize that structure. Such a development was predicted back in ’86 by Marijan Korošić in his book ‘Inflation: possibilities of suppression’, describing practically the collapse of Yugoslavia. The EU is exactly on that path – suppressing freedoms, eliminating the market, bureaucratization and centralization are even stronger, and all of this will sooner or later spill over into a political crisis. This is exactly what happened to the former state.
With the moves announced by the EU leadership, interest rates will rise even more, lending will decrease, consequently production will decrease, which will reduce employment and all together will lead us into recession. Unfortunately, the EU sees the answer in even more regulation, in even more restrictions – Vidaković is categorical, announcing a parallel shift in the yield curve of government bonds, which will paralyze restrictive monetary policy, inflation will not fall sharply as the ECB hopes, banks will stop lending, investments will stop, production and employment will stop. The EU is not ready for this.
However, at the moment, citizens will be rubbing their hands as they will receive a significantly higher yield on bonds than on the miserable interest rates in banks, and the state will borrow more favorably than it could on the institutional financial market.
