Bank of Estonia: Interest payments may rise considerably in next few years

Ülo Kaasik
Ülo Kaasik Source: Arp Müller/ERR

Bank of Estonia (Eesti Pank) estimated that the combination of the continued state budget deficit along with rising interest rates, could increase interest payments on government loans by several hundred million euros a year within the next four to five years. Around €100 million has been earmarked from next year's budget to cover loan servicing costs.

On Thursday, it emerged that interest rates on 10-year bonds issued by Estonia in 2020, totaling one billion euros in value had increased 32-fold to four percent. "This four percent interest on a billion-euro loan means that every subsequent year, we will pay €40 million in interest costs," said Ülo Kaasik, vice president of Bank of Estonia.

"It comes at an additional cost to the state budget, and given there will also be a budget deficit of over €1 billion each year, we will start to accumulate these €40 million chunks, meaning interest payment amounts in four to five years' time could be in the hundreds of millions of euros," Kaasik explained.

"If we look at the fiscal deficit for the government sector as a whole, as described in the budget strategy, it comes to over €5 billion for the next four years. If this €5 billion is borrowed at an interest rate of four percent, that would mean spending (an additional) €200 million a year. Every year," Kaasik added.

"This is a huge amount, that we need to take into account in all our plans. Certainly, we can no longer claim that we can somehow get debt for free, or very cheaply. There is still a pretty big cost and we have to take that into account in all our plans now," Kaasik said.

Estonia's higher interest rates reflect the new reality we currently find ourselves in, according to Kaasik. "Interest rates vary from country to country, but the truth is that lately, they have been extremely volatile. However, they have also been rising rapidly against a backdrop of accelerating inflation and tightening monetary policy," Kaasik noted.

"German 10-year bond yield rates are currently at just over two percent on the market. When we talk about interest rates in our region, they are none on the market at exactly the same level of maturity, you can't compare them like-for-like, but when we talk about the order of magnitude, in the cases of Latvia and Lithuania, the rates are also 3.5 percent and above. If they were to go to the market, they would have to pay about the same amount of interest," Kaasik added.


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Editor: Michael Cole

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