The Estonian government is set to begin an international issue of debt instrument in the volume of at least €1 billion for a period of ten years. The state plans to effectively double Estonia’s loan burden this year.
The bonds’ interest rate will become clear during the moment of issue and depend on market rates and demand.
“The Estonian state is issuing long-term bonds for the first time in 18 years. Our state finances are in order, Estonia’s public debt remains one of the lowest in the EU,” said Minister of Finance Martin Helme (EKRE).
Euribor 6-months headed for zero
If late last year, government sector loan burden came to 8.4 percent of GDP or €2.4 billion, it is now certain Estonia will borrow almost as much this year at €2.325 billion.
“Had there not been an emergency situation caused by the coronavirus crisis, Estonia would not have had to issue bonds. However, to make sure the state can perform its duties, we need to assume additional loan obligations,” the finance minister added.
The state has borrowed twice before this year by issuing short-term bonds with negative interest rates. During the coronavirus crisis, the state has issued a total of €425 million worth of one-year bonds and €150 million worth of six-month bonds. In late March, Estonia signed a €750 million loan contract with the Nordic Investment Bank to be repaid by 2035 and sporting an interest rate of 6-month Euribor plus 0.32 percent.
While the 6-month Euribor that also governs the home loans of thousands of ordinary Estonians is still negative today, the rate has been moving toward zero since the beginning of March. It stood at -0,429 percent when Estonia declared an emergency situation on March 12 and at -0,145 on Monday.
The bonds will be issued on the Dublin exchange to promote international investors’ interest. Luminor has issued pledge instruments secured with home loans in the volume of €500 million on the Irish exchange, while LHV is planning to do the same for up to €1 billion.
International ratings agencies have given Estonia favorable long-term marks, with Fitch and S&P putting the rating at AA- and Moody’s at A1 with a positive outlook.
“The government’s liquidity reserve must be sufficient to ensure state payments also during difficult times. Sums from the issue of instruments will be used to finance the state budget and the April supplementary state budget,” the Ministry of Finance explained.
According to the supplementary budget, fiscal deficit for 2020 will come to €2.62 billion, aid measures included. The deficit is caused by a sharp decline in tax revenue and considerable costs of the Unemployment Insurance Fund and the Health Insurance Fund in the coronavirus crisis.
“This issue is an important step also from the point of view of capital market development. The risk margin of ten-year government bonds will become a benchmark for all Estonian companies and banks that plan to issue debt instruments. Having the risk margin for government bonds will make pricing easier,” Helme added.
Even though the presentation aimed at investors provides that Estonia plans to borrow a few more times in 2021 and 2022, press representative for the ministry Ott Heinapuu said the need for additional foreign capital will depend on the state’s cash flow which is too soon to assess today.
The issue will be handled by Citibank, Société Générale and Nordea.
Financial measures threat to Eurozone
The European Central Bank warned yesterday that Eurozone countries’ fiscal response to the coronavirus crisis could raise questions in terms of states’ ability to repay their loans and hike the risk that some countries could drop the euro.
“If measures on the state or European level are considered insufficient in terms of ensuring sustainability of debts, the risk of countries returning to their currencies might be elevated,” the ECB communicated.
The European Central Bank estimates that the Eurozone’s government sector loan burden will grow by 7-22 percent this year as governments are borrowing hundreds of billions of euros to support their economies.