THE government announced yesterday it would be issuing €1.4 billion in treasury notes in a bid to boost the banking sector’s liquidity – but it remains to be seen whether the benefits will trickle down to the consumer.
Under the move, the state will be borrowing the €1.4 billion from commercial banks, who will then get their money back by taking out a loan for the same amount from the European Central Bank (ECB) but at a significantly lower interest rate, at 2.5 per cent, the ECB’s reference interest rate.
Commercial banks will be able to use the notes as collateral with the ECB. The nominal borrowing rate they will charging the government is 3.5 per cent.
“This is the lowest borrowing rate the government has secured over the last years for such a large amount,” said Stavrakis.
The treasury notes will be issued on January 2, 2009, meaning the scheme would not affect the government’s main economic indices for this year. The government is to repay the loan in 39 weeks – which falls around October 2009.
The benefits are two-fold: on the one hand, the government will be able to service its debt at a lower cost (it would be more expensive for it to borrow from abroad); and on the other, banks get a good deal with the ECB that should help increase their liquidity.
Speaking to reporters yesterday, Finance Minister Charilaos Stavrakis passed the deal off as a win-win situation.
He said that 2008 would close with a 1 per cent fiscal surplus and an 11 per cent reduction in the public debt, from 60 to 49 per cent, which, he added, corresponds to savings amounting to two billion euros.
Stavrakis said the timing of the move was just right: a huge decrease in the public debt, a budget surplus and a high rate of growth of the economy (projected at 3 per cent).
“We want to take advantage of the robustness of the economy to borrow at the right time,” Stavrakis said, explaining the motives behind the move.
Bank liquidity would be boosted by some €700 million, since the government would deposit about half of the €1.4 billion back into the banks.
“An indirect result of this improved liquidity will be to allow banks to offer better credit facilities to businesses,” noted Stavrakis.
Experts aren’t so sure. Economic analyst Dr. Stelios Platis told the Mail that though this was “definitely a smart move” as far as the government was concerned, he was sceptical whether consumers would get anything out of it – particularly in the form of more attractive loans.
“Is it a stimulus package, or just a scheme supporting the banks? I think more the latter,” said Platis. “My view is that this will not reach the consumer.”
“For one, what are the commitments of the banks toward their customers? In other words, what will they do with the €700 million they get to keep? Also, what interest rate will the government be offered for the €700 million they will deposit into the banks?
“There are too many unknowns,” said Platis.
Last year, commercial banks lent a total some €5 billion to the economy overall; by comparison, €700 million seems little.
And the duration of the debt issue was too short to qualify as a bonus to common people.
“It sounds more like a short-term liquidity boost to banks,” said Platis.
If the goal had been to ease interest rates, proposed Platis, the government could have gone down a different path: guarantee the housing loans of people in need, and in particular the loans of small and medium enterprises.
The economist wondered also why banks needed an injection if it was true that their liquidity was fine – a claim made by both the Central Bank and the government just days ago.
This was something over which Stavrakis was taken to task yesterday. The minister danced around the question, offering:
“The banks do not have any immediate liquidity problems. It is just that they do not have any surplus liquidity that would enable them to undertake finance projects,” he said.
