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Luminor economist: Interest rate on Estonian government bonds is too high

Euros. Source: Siim Lõvi/ERR

This week, the Estonian government issued €1 billion-worth of bonds at an interest rate of 3.35 percent. While in general, this is good news, the interest rates ought to be lower, said Lenno Uusküla, chief economist at Luminor. Bank of Estonia (Eesti Pank) Governor Madis Müller also pointed out that Spain has issued bonds at the same time, though at a more favorable rate.

On Wednesday, the Estonian government issued around €1 billion in 10-year bonds. Approximately 180 investors wanted to subscribe for a total of more than €7.2 billion in Estonian government bonds, with the price cheaper than it had been before.

On social media, Bank of Estonia (Eesti Pank) Governor Madis Müller pointed out that the bank's portfolio managers were aware Estonia had ended up issuing long-term bonds on the same day as Spain.

"Of course, the volumes are different, but there is strong investor interest in both. The interest rate was 3.35 percent for Estonia and 3.26 percent for Spain," he said, adding that until the first half of 2022, borrowing had still been cheaper for Estonia than for Spain.

According to Müller, while investors may well have reassessed the relative risks of particular countries following Russia's full-scale invasion of Ukraine, the relatively weak state of Estonia's economy has also played a role.

Luminor's chief economist Lenno Uusküla told ERR that Estonia's latest bond yield is good, when compared to the previous period and in light of previous rates. In the short-term, interest rates have started to come down, and this is also creating downward pressure when it comes to long-term rates.

"At the same time, the interest rate on Estonian government bonds is still too high," Uusküla said.

"The fact that Spain is able to issue bonds at lower rates at the same time shows how Estonia is perceived and how fragmented the euro zone bond market is. Estonia's economic outlook is strong, especially compared to Spain, and its debt levels are significantly lower. The Estonian government's interest rates should be low."

To reduce the risk premium, he said, the state could also act alone. In particular, it should explain to the world that Estonia is a place with good potential, low debt and no risk. Estonia's unfair interest-rate premium could also be reduced by buying Estonian bonds from the European Central Bank, which is tasked with ensuring a consistent monetary transmission policy in each euro zone member state.

"At the moment, however, monetary policy transmission is uneven, financial conditions are worse than elsewhere in the euro zone, and therefore Estonia is suffering more than other countries," said Uusküla.

He added that because Estonia has increased it activity on the bond market and also plans to issue more bonds this year, the attractiveness of bonds is slightly higher than before. This will ensure better financing conditions not only for the government, but for the entire Estonian economy, meaning everyone in Estonia stands to benefit.

Müller also pointed out that not everything depends on Estonia, and that the role of foreign partners is important, both for security and the economy.

"The country's growing contribution to defense and NATO enlargement have clearly led to a strengthening of our defense capabilities in the last few years. But can we sell our story even better to investors?" Müller said.

"What is more positive for Estonia is the comparison with our Baltic friends. Interest rates have risen for all the governments in Europe. However, in a comparison of the three Baltic countries, borrowing is still slightly cheaper for Estonia."

Müller added, that the almost €1 billion borrowed on Wednesday means the Estonian state will pay back €325 million in interest over a period of ten years.


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Editor: Michael Cole

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