The debt requirements of €5.07 billion for 2020-2021 exceed the liquidity reserve substantially, making current principles redundant a requiring a re-think, ERR's online news in Estonian reports.

New principles to be introduced will manage the interest rate of the government's debt portfolio differently and will include measures such as the state potentially setting up a European Central Bank (ECB) account and doubling the stabilization market reserve to €200 million.

The current rules include a requirement for the treasury to exchange the fixed interest rate of 0.125 percent on recently issued 10-year bonds for a variable six-month Euribor rate, which is not economically viable in the current low interest rates environment, ERR's online news in Estonian reports.

The treasury's draft in brief

• Under the current regime, interest rate risk is based on the principle that interest rate and currency risks of financial assets and liabilities balance each other. This is to be changed.
• The maximum fixed interest fixation period over six months will apply to the part of the debt portfolio corresponding to €600 million.
• Debt portfolio over €600 million will be subject to the requirement that the average interest rate fixation period be at least three years.
• The market value of the liquidity reserve will be raised from €250 million to €600 million - not subject to asset allocation restrictions - in order to ensure pensions, benefits and salary payments are properly made at state settlement banks within limited time-frames. 
• The market value of the stabilization reserve is to be increased from €100 million to €200 million, which will not be subject to asset allocation restrictions.
• The Treasury will be granted the right to settle in the European Central Bank (ECB) and the Bank of Estonia, without volume restrictions. 
• The amendment allows the state, if necessary, to open an account with the ECB to hold unrestricted funds as a back-up for any required large-scale settlement payments related to the servicing of debt obligations.
• The Treasury has gradually started concentrating funds in bank accounts in line with the Riigikogu's wish to lean on the reserve if necessary. This may create a conflict with the requirements of current regulations, however.
• From the market value of the liquidity reserve of €600 million and the market value of the stabilization reserve of €200 million, banks are required to diversify by 20 percent (i.e. the investment per bank may not exceed 20 percent of the market value of the corresponding reserve).
• The changes are set to be discussed by the government at its regular Thursday meeting.

The Treasury is part of the Ministry of Finance.

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