Editorial: banking enters times of emergency

Photo: Urmas Nemvalts

In all likelihood, never before has world history had times when one makes fixed term deposits and gets no interest from the bank. Interest rate reflects the price of money which at present is unprecedentedly low. If something is cheap, little needs to be paid for it while one does not get much for it either.

In largest banks in Estonia, interest rates of fixed term deposits have dropped to zero or just barely above. To exemplify: put €60,000 into Estonia’s largest bank for 11 months. At the end of the term, your interests amount to €5.5. So you can go see a movie – alone.

But, on the other hand, the nonexistent interest rate is good for the borrowers. Six month Euribor, the base interest for commercial banks, is at its historic lows of 0.061 percent – not too far from zero or below. Part of loans assumed by bigger companies are tied to one month Euribor, and at one of the banks home loans are tied to one or three month Euribor, which is in minus already.

Loan interest is made up of two components – base interest, to which is added the client’s risk marginal. With a negative Euribor, to get the total interest this needs to be subtracted from the marginal.

True, from the beginning of last year already, the banks begun to write in the loan contracts that a negative Euribor will be reckoned as zero. Older loans may not have such clause attached, as no-one could imagine a negative Euribor.

Estonian state is not participating on international bond market, but states with high ratings have also begun to get loans at negative interest. This means that investors are willing to pay extra to lend money to governments. And it is not only nations with such strong finances as Germany who are enjoying the negative-interest loans, but also places line Spain which was forced to ask for international help just a couple of years back due to a banking sector about to collapse.

As explained in Postimees today by local Danske Bank CEO Aivar Rehe, now would be best time for companies to invest as in the three to five years when interest rates are highly likely to start rising again most of today’s investments will have already been paid – and paid off.

According to bankers, Estonian enterprises are strong and it is only the insecurity due to neighbouring economies that hinders then from investing.

Both enterprises and the state should think if it would make sense to borrow money now that it is cheap, or to wait until European economy is back on its feet and the confidence up. By then, however, the price of money will probably have performed a decisive leap.