The Ministry of Finance had taken into account the fact that interest rates would rise significantly when planning next year's budget, Minister of Finance Keit Pentus-Rosimannus (Reform) said on Thursday. Interest on loans taken out will be around €200 million in the coming years.
Asked during an interview with "Aktuaalne kaamera" (AK), what impact the new rate will have, Pentus-Rosimannus said it will hopefully kill the idea that loans with non-existent interest rates will be around forever.
"Hopefully, the time for these stories is now over. A year ago, I was scolded in front of Parliament for daring to doubt the veracity of such claims, but now interest rates are rising," she said.
Secondly, the minister said the overall external environment in the region makes investors cautious. This means Estonia has a higher rate than other countries in Europe.
"While the base rate for European countries is currently around 3 percent, there is an additional country-specific interest rate for each country. In Estonia's case, it came to just over 1 percent. There are also experts who say that, given the situation, it was even surprisingly low," she said.
Asked if the 4 percent figure was unexpected, the minister said a "significantly higher" interest rate was taken into account when planning the budget. She said 4 percent was "within the range" that had been discussed.
"Of course, there were hopes that this level would be lower, but as the base rate itself is already 3 percent, it was predictable that the time of cheap credit was over," she told AK.
Asked if the rate rise would affect decisions regarding the state budget and Estonia's deficit, she said the deficit mostly comes from an "unavoidable" increase in defense spending.
This could not be excluded from the budget due to the ongoing security situation, she said.
"So it [the deficit] has been unavoidable and certainly justified for a certain period of time, but in the long term, of course, the only solution is still fiscal restraint. There is no justification for keeping the budget in deficit in the long term. We must not allow fixed expenditures to be covered by borrowing, and this is something that we must bear in mind at all costs when planning our budgetary policy," the finance minister said.
Ninety million euros has been allocated to cover interest costs in next year's budget and she said this will not change.
Pentus-Rosimannus said calculations have been carried out for future interest costs — which are growing every year — and this was kept in mind during budget strategy discussions.
"In four years' time, the interest costs that will have to be paid to service the loans already taken out will be approximately €200 million. This is a very high cost. Of course, the situation would have been better if we could have used reserves in the intervening years of the crisis. Unfortunately, we did not have the opportunity to use the reserves we had built up instead of issuing bonds. So that is why our situation is such that the cost of interest is increasing year by year," she said.
On Thursday morning, it was reported that Estonia's 10-year bonds sport a coupon rate of 4 percent, up from 0.125 percent when Estonia issued €1.5 billion worth of bonds two years ago. Effectively, a 32-fold increase.
Prime Minister Kaja Kallas (Reform) described the rate as a bad surprise for everyone.
Editor: Helen Wright