Financial "foolishness"/ The government takes on expensive debt to pay off the cheap debt ahead of time

2023-06-07 09:45:00, Aktualitet CNA

Financial "foolishness"/ The government takes on expensive debt to pay

Edi Rama and Delina Ibrahimaj

The time when Albania used to borrow at low interest rates in the international markets seems to have ended. The Ministry of Finance received 600 million euros of debt with a maturity of 5 years on Tuesday through the issuance of a Eurobond in the European capital markets. According to the Ministry of Finance, the interest on the bond was 6.125 percent.

Two years ago, Albania managed to successfully issue a Eurobond with a 10-year maturity against 3.75 percent interest, or almost twice as cheap as the 5-year debt received this Tuesday. In 2020, the 5-year eurobond was obtained with 3.5 percent interest.

The increase in borrowing costs is related to the new situation of financial markets in Europe. Due to high inflation, the European Central Bank has tightened its monetary policy several times in a row, increasing the base rate of the euro to 3.75 percent, when only two years ago the base rate of the euro was 0.

Buy and sell puppies

In this budget, the Albanian government has planned to borrow 55 billion lek or about 500 million euros in total. Of these, 200 million euros will be financed by borrowing in the domestic market through securities, while another 300 million euros will be financed from abroad through EU grants, soft loans from donors and part of the debt obtained with eurobonds.

But why did the government decide to borrow 600 million euros with the Eurobond, when the programmed limit of external borrowing is 300 million euros? The reason is that the government has considered early repayment of part of the debt obtained through the Eurobond in 2020, which matures in two years.

"The new issue is planned to be accompanied by a repurchase transaction of a part of the Eurobond that matures in 2025, thus reducing the risk of refinancing that year," the 2023 Debt Plan explains.

The 2020 Eurobond was issued with an interest of 3.5 percent. This debt matures and must be repaid in 2022. Now the government borrowed at 6.12 percent to pay off early a debt that has interest almost twice as low.

Financially, this is a senseless operation with tens of millions of euros of financial damage to the state and can only be justified in one scenario. The government expects that after two years the interest will be even higher than now, so it is in a hurry to take the debt that it would have to take after two years.

Waste of money and chance

The Albanian government had other alternatives to finance its payments in foreign currency. One of them is borrowing in the domestic market, either through the issuance of domestic bonds in euros, or through borrowing in Lek and then exchanging it for euros in the domestic market. This operation could have many benefits for the budget, but also the economy.

In the current conditions, when the euro depreciates by 1 lek every two days, government intervention in the domestic market would stabilize the exchange rate, but would also create direct financial benefits for the state budget.

First the government would make money from the exchange rate. Second, it would materialize the decline of the euro in the budget by reducing the public debt. So an operation that had only benefits in every direction.

But apparently the government has decided to play on safe ground and get euros from abroad at a time when the Bank of Albania, but also the government itself, say that the exchange rate is unbalanced by the massive supply of euros in the domestic market./ Oligarchy. al