Size of profit distribution breeds ill will between Ministry of Finance and Bank of Estonia

Photo: Toomas Huik

The Reform Party led Ministry of Finance wanted the central bank of Estonia to allocate €12.8m. The council of Bank of Estonia, however, decided on Tuesday to allocate a quarter of last year’s profit, €8.5m, for state budget.

Chairman of Bank of Estonia governing council Jaan Männik noted that the votes fell seven «for» and one «against». «The board was positive the proposal would pass,» said Mr Männik. The one against-vote was from council member Valdo Randpere, from Reform Party.

Mr Randpere said the central bank should have considered the government has to pay back the profits earned from Greek government bonds. Pursuant to last year’s agreement of eurozone ministers of finance, Greece will be returned the profits earned by European Central Bank by Greek bonds. The refund is aimed at easing Greece’s debt burden. Bank of Estonia’s share of Greek bonds profits is €5.7m.

According to Mr Randpere, the central bank ought to have first subtracted the Greek payment from the profits, and allocated the usual quarter from the «leftovers». Thus, the central bank should have paid €5.7m and €7.1m, totalling €12.8m.

«In my opinion, Estonia’s state budget is very tight; I do not sense a desire in Parliament nor among the wider public for the state to invest less into social or educational measures, financed from the state budget,» said Mr Randpere. «I was surprised to be the only Bank of Estonia council member to think the profit distribution ought to have been bigger.»

Pursuant to law, the profits distributed by Bank of Estonia go to Stabilisation Reserve Fund. In order to return profits made from Greek bonds, the government now has to take the money from state budget.

«The council decided to give the maximum the long term profit distribution strategy affords,» commented Mr Männik via the central bank press release. «Among other things, the profit distribution covers Bank of Estonia’s share of the profits made by European central banks, last year, from Greek bonds purchased within the bond buying program.»

Minister of Finance Jürgen Ligi claims the statement of Mr Männik is cynical and insincere.

«Männik is quite cynical, claiming that Bank of Estonia allocate the maximum within its rights,» commented Mr Ligi. «Namely: the strict limit was set by the council itself, for that very vote,» he said.

«The second claim – that the 25 per cent included the Greek bond purchase profits – is also incorrect. According to the agreement, the €5.7 was supposed to be the profit distribution refunded to Greece via state budget,» added the minister.

«Instead of the insincere statement, they could just have honestly said that, Greek bonds profits subtracted, less than usual would be paid into the Stabilisation Reserve Fund. Legally, it would even have been correct,» stated Mr Ligi.

Another storm is brewing around how the refund of Greek bonds profits was decided. Mr Ligi believes this was decided by the European Central Bank (ECB); Bank of Estonia is convinced that the decision was taken by the Eurogroup – the council of eurozone ministers of finance. Usually, the ECB president Mario Draghi attends the Eurogroup meeting, wherefore these kinds of decisions cannot indeed be made without his approval.

Bank of Estonia and Ministry of Finance quarrelled over profit distribution last year as well. Then, Bank of Estonia wanted to cancel distribution of profits altogether, citing risks in the eurozone.

Central banks have purchased €200bn worth of troubled states’ bonds and extended €850bn in loans to commercial banks, to stabilize money markets. Mr Ligi thinks Bank of Estonia has no reason to increase its capital to €1.3bn, as desired.

«Bank of Estonia’s profit distribution is not for budget spending; pursuant to law, it is also meant for financial stability, just like the reserve floated by Bank of Estonia as reason for keeping most of the profits,» underlined Mr Ligi. «At that, Stabilisation Reserve Fund also serves as protection against bank of Estonia’s risks.»