Multiple increases in interest costs have greater consequences on those with a higher debt burden and a smaller budget. Tallinn, for example, covers the increased interest costs in the millions with its own funds, while Lääneranna municipality seeks a new loan to cover a few thousand euros.

Refinancing loans or replacing an old loan with a new one is also not the most prudent course of action during periods of elevated Euribor. Also, there is a legal cap on the net debt burden.

Saku, located in Harju County, has loans totaling €14,3 million, with interest rates varying from 0.68 to 1.13 percent, plus the six-month Euribor rate, which is currently around 3.5 percent.

According to the chief of the municipality's financial department, Randar Lohu, this year's budget has allocated €437,00 for this purpose, compared to €130,000 last year. However, a threefold increase in interest rates does not necessitate loan refinancing for a municipality as wealthy as Saku.

"At the moment, we are meeting our loan obligations from our own resources and there are no plans for refinancing," Lohu said.

Unlike the municipality of Saku, the municipality of Lääneranna in Pärnu County intends to refinance its current loans with a new loan, and the municipality's council has given its consent, Ingvar Saare, the mayor of Lääneranna, told ERR.

Even though the banks' own margins are reasonable, the rise in the Euribor will have a significant impact on the municipal budget, he said.

The situation in Lääneranna is also a little more critical than in Saku municipality due to the smaller budget: while last year €60,000 were spent on interest, this year the budget forecast is €159,000. The municipality's six loans, totaling €4.3 million, are linked to six-month Euribor.

Annual loan and interest payments total €724,000, whereas the municipality's operational result, or the difference between expenditures and receipts, is €669,000, suggesting a slight deficit. As a result, a new loan to satisfy the loan obligations will be necessary; savings are searched for simultaneously.

Saare said that the municipality's debt-to-equity ratio is currently below the limit, allowing for new financing. The goal is to spread out the loan payments over several years, which will relieve budgetary pressure while increasing the overall cost in the long run.

Tallinn estimates cost increase in millions

The largest municipality, Tallinn, has one fixed-rate bond and the rest of its loans and bonds are based on the three- and six-month Euribor rates, according to the city's finance chief, Silver Tamm. The average three-month Euribor used to be 0.35 percent and the average six-month Euribor 0.68 percent, whereas today these averages have increased to 2.7 percent and 3.2 percent, respectively.

The total amount of Tallinn's loans and bonds at the end of the previous year was €216.5 million, so the increase in interest expenses is also in the millions.

"Interest payments on debts incurred and bonds issued by the City of Tallinn totaled €1.5 million last year. Interest expenses have been allocated €5 million in this year's budget, but it should be said that this includes interest on the new budget loan of up to €90 million for 2023. Interest expenditures on existing liabilities are estimated at €4 million, a €2.5 million increase from the previous year," Tamm explained.

At the end of last year, Tartu, which is nearly five times smaller than Tallinn, had €98,2 million in loans with an average interest rate of 2.67 percent. Tartu expects its loan deficit to approach €140 million this year, as it plans to borrow up to €51 million for investments.

Tartu has a higher increase in interest expenses than Tallinn. According to Tartu's finance chief, Meelis Luht, the city will spend about seven times as much on interest this year as it did last year.

"Actual borrowing needs and resulting interest costs will become clear over the course of the year and will depend on the timing of investments," he said.

Luht said that the current year's average interest rate and interest charges are highly influenced by economic and credit market conditions.

We are currently assuming a 4 percent interest rate, but changes in the Euribor and inflation are highly unpredictable. "However, until the conflict is resolved and the energy market stabilizes, we must anticipate higher borrowing costs," he said.

Tallinn's net debt load was 21.2 percent at the end of the previous year, whereas Tartu's was 38 percent. The legislation allows towns to have a net debt burden of 60 percent of budget receipts, while the present restriction is even 80 percent.

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