Estonia says QE won't trigger bond issue

By bne IntelliNews March 11, 2015

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The European Central Bank's quantitative easing (QE) programme should prove positive for the Estonian economy, but will not trigger a sovereign bond issue to take advantage of lower borrowing costs, the central bank pledged on March 10.

Eesti Pank made its first purchases under the EU-wide deflation-fighting programme on March 9. However, unlike other central banks across the bloc, it bought no Estonian debt, as there are no qualifying active issues. Instead, it bought bonds of institutions such as the European Financial Stability Facility, the European Stability Mechanism and the European Investment Bank.

Estonia's participation in the programme involves the purchase of €100mn-120mn worth of bonds each month to September 2016. However, the country won't be looking to increase its state debt in a bid to cash in, say officials.

The deputy governor of Eesti Pank, Ulo Kaasik, told ERR that the effect of the ECB scheme will lead to lower interest rates in the country. However, he confirmed in an FAQ on the central bank's website that there are no plans to buy Estonian bonds under QE. 

Nor, says the FAQ, will QE become a pretext for the Estonian government to issue new sovereign bonds to take advantage of lowered borrowing costs. In fact, Eesti Pank dubs the idea a "danger", repeating the austerity mantra that has prevailed in the country since the economy fell off a cliff in 2009.

"The launch of [QE] is not in itself an argument in favour of issuing bonds," Eesti Pank writes. "Any decision by the state to borrow money should be grounded on the essential need to cover spending above and beyond the revenues of the budget and not just because one possible way of borrowing has become cheaper than it was."

There is no need to issue additional bonds to fund the state budget, Eesti Pank insists. The Estonian economy is currently at a stage where the government should be looking "to make savings rather than to borrow to cover additional costs," it adds. "The rules of the European Union and also the national laws ... require the budget to be structurally in balance."

Lead us not into temptation

That statement looks all the more stern given that Estonian state debt is the lowest in the EU by some margin. At just 10% of GDP, the burden is minute in comparison with many EU member states, and is the smallest in the CEE region. The country last accessed the debt markets in 2002, according to Bloomberg. 

Instead, it prefers to access loans from the same European institutions it is now supporting. Estonia's national debt nearly doubled in 2012 due its involvement in the European Financial Stability Facility.

When the ECB announced the QE programme in January, local entrepreneurs and academics urged policymakers to sell debt to invest in highways and railroads, reported the same newswire. Yet officials continue to line up to warn against the temptation to do so.

Kaasik added that as well as a lack of sovereign debt, there are no qualified bonds from Estonian institutions on the market either right now. ERR suggests state-owned Elering and Eesti Energia could be candidates to issue new debt, but reports that they show little interest. Grid operator Elering was last in the market in 2011. Power utility Eesti Energia sold €300mn of bonds in March 2012.

Instead, Eesti Pank says it will stick to a conservative strategy, and look to the benefits that QE offers the real economy. The programme will ease financing conditions and help boost growth in economic activity, it pointed out.

"Long-term interest rates will remain low in the years to come and the fall in yields on sovereign bonds will encourage investors to seek out more profitable investment opportunities," the central bank insisted. "For this reason there should be growth in investment in the economy in Estonia and elsewhere in the euro area. Increased economic activity in Estonia's trading partners will give a lift to growth in Estonian exports."

That careful outlook also extends to the assets the central bank is prepared to buy. "If there are no bonds in Estonia which Estonia can buy, then the purchase of Europe-wide institution bonds will commence. Estonia will not buy state bonds of other nations," Kaasik told ERR.

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