Estonia is issuing €1 billion worth of ten-year bonds the coupon rate of which has grown by 32 times in the last two years. To 4 percent. "The foreign environment is something else completely. All states that are issuing bonds must consider a very different environmental from just a few years ago," Kirsipuu said.

The deputy secretary general said that the base interest rate for long-term borrowing is around 3 percent today to which every country's risk premium is added. Everything beyond 3 percent is the national risk margin. Just as housing loans have the Euribor plus your personal risk margin, so does it work for states. Estonia's risk margin came to 1.05 percent, which, considering feedback from investors and the organizer of the bond issue as well as geopolitical risk, is not bad at all," Kirsipuu suggested.

If two years ago, 280 investors took an interest in Estonian bonds, offering a total of €7.7 billion, Thursday's results suggest the new issue was of interest to 93 investors, with a total offer of €1.8 billion. This dip in interest is noteworthy even in the conditions of markedly higher interest.

"The times are very different. Many investors said they are not interested in Baltic bonds. There was none of that in 2020. In truth, it remained unclear during the issue whether our target of €1 billion was even feasible at the interest rate we were aiming for," Kirsipuu remarked.

The undersecretary said war in Russia was behind investors' reluctance. "It is the Ukraine war that is behind caution among investors when it comes to our region," he said.

Kirsipuu suggested it is difficult to forecast whether bond rates will continue to go up. "Investor confidence is shaky as we are operating on a highly volatile market. There is great uncertainty, and it would be premature to make any claims in such a situation."

He could not say how much short-term debt Estonia should take on next year that could also sport higher-than-previously interest rates, adding, however, that it will likely be much less than this time around. Around €200-300 million, with the exact volume depending on state cash flow.

"The plan for now is to cover the lion's share of what we need through long-term bonds," Kirsipuu offered.

The undersecretary said that the ministry has factored annual interest payments of €40 million, set to only grow in the future, into next year's state budget. "These expenses will probably grow in time, not just because of higher rates but also permanent fiscal deficit."

He suggested that Estonia should try and reduce its fiscal deficit to below 3 percent once "extraordinary" times pass.

"The state budget and fiscal strategy currently include quite a few temporary expenses, such as greater national defense funding, so I believe the fiscal deficit will be reduced even without the need for tax hikes," he said, adding that whether it will move close enough to fiscal balance again is a matter of political choices. "We cannot consider a deep and lasting deficit financially sustainable."

Minister of Finance Keit Pentus Rosimannus (Reform) did not find the time to comment on the interest rate spike for Estonia's ten-year bonds.

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