Bank of Estonia governor: A €1 billion loan sounds logical

Madis Müller.
Madis Müller. Source: Priit Mürk/ERR

The Bank of Estonia's Governor has said it is reasonable to provide the necessary support to the economy during the coronavirus crisis, the state must be prepared to temporarily reduce the budget, and the bank considers borrowing to be justified.

Last week Minister of Finance Martin Helme (EKRE) said the government would be borrowing at least a billion euros to mitigate the effects of the virus on the economy, and potentially up to €2 billion.

Governor of the Bank of Estonia Madis Müller said in an interview with newspaper Eesti Päevaleht (link in Estonian): "The Minister of Finance has indicated that since we recently had a short-term bond issue, its volume can be increased. Yes, that would be the fastest way, but we could also consider issuing long-term government bonds right away. Interest rates are so low and it is better to avoid having to refinance short-term bonds, for example, within a year."

He added: "If you are already issuing bonds, it would be wise to do so with a small margin. This loan can easily be repaid later because, again, interest rates are extremely low."

Asked whether banks could become cautious and stop lending money at favorable rates, Müller said: "In recent weeks, investors have been selling risky assets such as equities and buying government bonds, for example German ones. Italian interest rates have risen, but so far it has been exceptional among European countries. I, therefore, consider it very likely that the Estonian Government will borrow on good terms. Another issue is how conservative banks are in lending to companies. The European Central Bank is working hard on this, and last week's decisions fully support it."

Müller also said Estonian banks are resilient at the moment and customers do not need to worry about service disruptions.

On Friday, the finance minister, who promised to borrow €1 billion to support the coronavirus (COVID-19) crisis, issued a directive increasing the authorized issuance volume of short-term bonds by €600 million.

The finance minister's directive raises the maximum amount of bonds allowed under the Short-Term Bonds Framework from €400 million to one billion. Raising the overall program cap is needed to give the Treasury more flexibility in responding to a deeper-than-projected cash-flow deficit, the Ministry of Finance said Saturday.

"I think it is wise to create a strong cash buffer right now, as the financial markets are in an unpredictable situation and the availability and cost of the funds needed may be less favorable later," Helme said in a statement. "There is no plan to spend that money right now because the state has a strong buffer of 1.3 billion," he added.

The details of the bond issue are still to be determined and depend, among other things, on the speed and volume of borrowing money.


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Editor: Helen Wright

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