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€400 million loan will have interest rate of €10 million per year

Stacks of euro bills.
Stacks of euro bills. Source: Siim Lõvi/ERR

If Estonia takes out a new €400 million, as suggested by the minister of finance this week, interest payments will amount to between €10-15 million a year. Experts say the country's debt burden would still be lower than most.

Yesterday Mart Võrklaev (Reform) said Estonia could borrow more money rather than raise additional taxes to cover the €400 million hole in the budget.

It is not yet clear how big the loan would be, but Estonia is already planning to borrow several billion euros next year.

"Based on the 2024 budget, we need to borrow somewhere around €2 billion. Some of this is refinancing of existing short-term bonds and some of it is new borrowing to cover the so-called public deficit," said Janno Luurmees, head of the Ministry of Finance's State Treasury Department.

The government will likely borrow around €3 billion and this will mainly be done by issuing bonds.

The "Super Ministry" building, which houses the Ministry of Finance, in Tallinn. Source: Siim Lõvi /ERR

"We have assumed an interest rate in the order of 3-4 percent," Luurmees said.

Next year, €184 million will be spent on paying back existing loans and the interest generated by them. Costs increase every year by €40-50 million.

"If in the order of €400 million is added, it will add perhaps €10-15 million to the cost of borrowing," Luurmees said.

In other words, if Estonia borrows the full amount to patch the gap, little will change. Luurmees said: "It would be nothing extraordinary."

Swedbank's chief economist Tõnu Mertsina agreed. "This would add 1 percentage point to the projected debt burden, leaving Estonia's debt burden still low compared with most other countries," he said.

Tõnu Mertsina Source: Priit Mürk/ERR

However, even this figure may still be too small as the Ministry of Finance's forecasts have been overly optimistic. 

The economy could start growing again at the end of next year, Mertsina believes. Estonia will have been in a recession for over 2.5 years by then. New taxes may slow down recovery.

However this money is collected, by taxes or loans, its effect will only be felt if it is used the right way, the economist stressed.

"If we are simply covering current costs, that is unfortunately not a good policy, but it is probably a better policy than to start imposing higher taxes on a still recovering economy," Mertsina said.

If this money is borrowed now, in the coming years, when the economy has already recovered, it will be necessary to monitor more strictly that the debt burden does not increase further, added Mertsina.

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Editor: Barbara Oja, Helen Wright

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