Both companies and citizens borrow more cheaply than the state

The Government's latest borrowing from Deutsche Bank was a major failure because it could have borrowed more cheaply from the International Monetary Fund (IMF), which would have required what Montenegro needs at the moment - rationalization of public spending. In addition, since 2010, the state borrowed more expensively when we had a better international rating than when it was significantly worse.

This is what a financial consultant told "Vijesti". Goran Knezevic.

This week, the government concluded a credit arrangement with Deutsche Bank worth 100 million euros with a grace period of 12 months and an interest rate consisting of the six-month Euribor plus a margin (fixed interest) of 5,9%. The six-month Eurobor yesterday was 3,45% and is the highest since December 2008.

The credit rating agency "Standard & Poor's" (S&P) confirmed the stable prospects of Montenegro, while retaining the B/B rating. In March 2021, this rating agency lowered the country's credit rating from B+ to B.

"This is one of the paradoxes of our long-term borrowing, because the state borrows more expensively than the average weighted interest rate for all approved loans, and much more expensive than the average weighted indebtedness of the economy, which theoretically and practically should not be the case, the economy and Citizens borrow more cheaply than the state in the long term. If it wasn't tragic it would be funny. The state should be the best borrower. That's why in the banking regulation, the exposure of banks to the state is weighted with a risk weight of zero," Knežević pointed out.

From the Ministry of Finance, headed by the Minister Aleksandar Damjanović, said that the debt conditions and the current interest rate are completely dependent on international developments on the financial market and that the interest rate was negotiated at the lowest level that the bank could offer, in accordance with the conditions on the global market and in Montenegro. They said that citizens should not be subject to politicians' statements, that there are no well-founded threats to the stability of public finances and that the state settles all obligations responsibly and properly.

Damjanović's political opponents and former finance ministers Rasko Konjević i Milojko Spajic they told "Vijesti" that this is the most expensive loan that the state has taken so far, and the interest rate that was yesterday was 9,3%, and that with the borrowing cost of 1,35%, the effective interest rate on this loan exceeds 10,5 %.

Expensive debt long-term damage

Knežević said that before the loan from Deutsche Bank, we had a long-term loan from one of the domestic commercial banks at a rate of 7,5%.

"Such extremely expensive debts cause great long-term damage to the economic system of Montenegro, because the borrowing of the state, in a system in which the central bank does not approve loans, except under special conditions, and does not issue its own debts, creates a benchmark interest rate, which causes a lower level of investment spending , negative effects on the investment multiplier, credit multiplication, marginal taxes and overall economic activities, and especially on the development of small and medium-sized businesses, which, in terms of numbers, are dominant", explained Knežević.

He pointed out that the state could have borrowed more cheaply, and the fact that the average weighted economy borrows from the domestic banking sector much more cheaply speaks in favor of this unequivocal conclusion.

"Countries in an environment with a similar rating to that of Montenegro borrow much more cheaply. Some companies in Montenegro borrow at rates between 3-4% per year. This is a major failure of this Government that cannot be justified by rational economic argumentation. If they didn't know how they should have hired someone to advise them. It is not clear to me why, for example, they did not enter into an arrangement with the IMF, because the IMF would demand exactly what Montenegro currently needs - rationalization of public spending. Since 2010, our public duties have been full of paradoxes. I have already explained one big one. Another paradox is that we borrowed more expensively when we had a better international rating than when it was significantly worse. When our international long-term rating (Standard & Poor's) was BB+ (2008-2010), we borrowed on the international market by issuing euro bonds at rates that effectively approached 7%," Knežević pointed out.

Firefighting

The next paradox, according to his assessment, is that with the increase in indebtedness, the volume of government deposits with domestic banks grew, and the fourth paradox is that with the increase in indebtedness, the concentration of debt placed in individual projects increases.

"This only shows that by borrowing we put out the fires of budget illiquidity and that the infrastructure of financial stability and keeping track of borrowing does not work. Ten years ago, I wrote a column about the danger of our accelerated borrowing with reference to relevant studies, especially the recently published study by the BIS - Bank for International Settlements, as a bank of central banks, entitled "The future of public debt - perspectives and implications". The majority of serious studies (Rogoff and Reinhart) indicate that the growth of external indebtedness, that exceeding the value for the indicator of indebtedness in relation to GDP of 90% (where we seem to be now) leads to a reduction of GDP by no less than 1% and that an increase in indebtedness leads to to a significant increase in the budget deficit", explained Knežević.

Since the macroeconomic indicators of many countries have confirmed these research results before 2010, it means, says Knežević, that based on any further borrowing, which is not aimed at structural improvements and development, we can expect a certain drop in GDP and an increase in the budget deficit.

"Debt is often used as a cure for headaches, it treats the consequences, but it can worsen the causes. Borrowing is an easier way than implementing fiscal consolidation, which basically means a tax reform aimed at taxing the rich, strengthening tax discipline, which again affects the rich the most, and strengthening public expenditure management, where corruption and powerful interests are once again flourishing. That is why borrowing brings the danger of a lack of fiscal consolidation, which again means long-term maintenance or additional strengthening of the budget deficit. All this has happened in our country in the past ten years, even though we have been so busy with financial consolidation that it almost didn't happen," said Knežević.

Turkey borrowed at a rate of 9,5 percent

The Ministry of Finance said that it is about projected borrowing that, according to realistic needs, was approved by the parliament within the Budget Law for 2023.

"Since the Montenegrin economy has a seasonal character, i.e. it is largely dependent on the summer tourist season, in this part of the year the objective need for borrowing at the level of 100 million, out of the legal limit of 600 million, was expressed. We started preparatory activities and negotiations with credible partners in December last year, so that the contracted funds would be available in a timely manner. The mentioned funds are intended for meeting various budgetary needs and their distribution will be transparent", said the Ministry of Finance.

Damjanović's department said that we are far from the ideal position in negotiations, both from the aspect of global events, as well as the strength of the domestic economy and the burden of previous debts.

"However, the debt conditions and the current interest rate are completely dependent on international developments on the financial market. We emphasize that the fixed part of the interest (margin) is determined in accordance with the price of the financing source, the political risk of the country, its rating, but also in accordance with the price movement of Montenegrin bonds on the market and the expected interest rate on the bonds. Taking into account the above, the interest rate was negotiated at the lowest level that the bank could offer, in accordance with the conditions on the global market and in Montenegro", said the Ministry of Finance.

The increase in interest rates, as explained, is not only reflected in credit arrangements, but also in Eurobonds, so we have the example of the Republic of North Macedonia, which issued a Eurobond worth 500 million euros for a period of four years with an interest rate of 7,25% per year, which is a country with a better credit rating than Montenegro.

"Turkey, which has the same credit rating as Montenegro, yesterday issued a Eurobond worth 2,5 billion euros for a period of six years with an interest rate of as much as 9,5%. Such and a number of other examples speak in favor of the thesis that the so-called Expensive borrowing is primarily a consequence of rising prices on the financial market and affects not only Montenegro, but all other countries," said the Ministry of Finance.

The interest rate of the current credit arrangement, which is below the level of inflation, seems to have, as pointed out by this department, caused much more media attention than some previous significantly higher debts, in economically and politically more stable times, and with interest rates many times higher than at the then inflation rate.

"We remind you that in 2010 a Eurobond worth 200 million euros was issued for five years with a fixed interest rate of 7,875%, in 2011 a bond was issued in the amount of 180 million euros for a period of five years with a fixed interest rate of 7,25% , in 2014 a Eurobond was issued in the amount of 280 million euros with a fixed interest rate of 5,375%, while in 2016 a bond of 300 million euros was issued for a period of five years with a fixed interest rate of 5,750%. All this in a period of much greater stability and, what is very important, lower inflation rates at the international level and in Montenegro," the department emphasized.

Expect even higher interest rates

The President of the SDP and former Minister of Finance Raško Konjević said that the interest rate today is almost 9,3 percent, including the costs of loan processing, and that since the restoration of independence, the price of money for borrowing has never been higher, especially that this time the borrowed money goes into current consumption, which is extremely bad.

"The amount of interest is a direct relationship between creditors and the Government and the state of public finances. In just a few months, the interest rate for government debt increased from 5,5% for the first debt with Universal Bank, then 6,5%, then 7,5% and today 9,3%, which is the current interest rate with a tendency to increase due to Euribor estimates. It turns out to be paradoxical that it is cheaper for citizens to borrow from commercial banks, because the interest rate is lower for their cash loans than for the state. Therefore, creditors have more trust in citizens than in the Government. "It is clear that the great distrust in the Government's policy and the state of public finances is dominant due to the fact that the Government has fallen and lost legitimacy and populist measures that caused the "rampant" of the expenditure side of the budget without coverage in real revenues," Konjević said.

He claims that everything was possible, citing as an example Macedonia, which issued in February 600 million euros of bonds with an interest rate of 6,25%, which mature in four years.

"The demand for the Macedonian bond was 2,5 times higher than the issued amount. Romania, Hungary and Serbia had a similar maturity and interest rate. Everyone went for bonds as the most transparent form of debt, and Montenegro is entering into bilateral banking arrangements at enormous interest rates. Croatia, for example, issued the so-called "people's bonds" on the domestic market for institutional investors and citizens with a minimum deposit of 500 euros. The interest rate is 3,65% and it collected 1,85 billion euros," said Konjević.

He added that the government planned to borrow another 500 million this year, and that due to the wrong way and dynamics of borrowing, it is expected that the rates of new borrowing will be more than double digits.

"This will put public finances in an additional bad state due to the high interest rate and the fact that most of the debt goes to financing current expenditures due to open populism in government measures that will cost the citizens of Montenegro "hefty" in the future," said Konjević.

"Vijesti" contacted the SD president Damir Šehović, but he did not answer the call.

Should have gone to the international bond market

Milojko Spajić, president of the Europe Now Movement and former finance minister, said that the interest rate for this loan indicates that it is the most expensive loan in the history of Montenegro.

"Based on the interest rate (9,32% compared to the previous debt, the highest) and the debt/commission costs of 1,35% (compared to, say, bonds from 2020 where the costs were 0,19%). The cumulative effective interest rate on this loan exceeds 10,5%," said Spajić.

Spajić claims that the loan could have been cheaper.

"First - the budget had to be balanced and there would be no need for even a cent of debt in times of economic crisis, as in the two years of our Government's budget - when we had a surplus of the current budget for two years in a row, that is, we got rid of debt, compared to the current situation deficit of the current budget, where we borrow for current consumption, which was raised by over 350 million euros without additional sources of income. Second, let's say that we still want to borrow money even though we have a current surplus and have no need to borrow - we could get out of the swap arrangement we entered into in a timely manner and take around 50 million euros interest-free. If it had come out in time when I publicly asked for it to be done - the net cash would have been around 150 million euros, and the risk of the Euribor continuing to fall would have been practically non-existent, now that is no longer the case", said Spajić, adding that if we want at any cost, to borrow, we should have gone to the international bond markets, which correctly measure the borrower's risks.

"This much interest is only a consequence of the poorly planned budget for 2023 and the lack of vision when it comes to the fiscal framework for the next medium-term period, in which not a single reform has been specified, and the deficit and public debt are growing," Spajić said.

Citizens should not succumb to politicians' statements

The Ministry of Finance announced that the current level of civic activism and interest in policies of public importance is certainly encouraging and shows that we have democracy at work.

"But, on the other hand, the radical and ill-intentioned tone coming from certain addresses obliges us somewhere to send an appeal to citizens from the institutional level not to succumb to fear under pessimistic forecasts, mostly politically motivated, scenarios of bankruptcy and collapse of public finances. Therefore, there are no well-founded threats to the stability of public finances, the state settles all obligations responsibly and in an orderly manner," emphasized the Ministry of Finance.

Verification of the correctness of the previous decisions of the Ministry of Finance in the previous days came, as they stated, in the form of a report by the Standard&Poor's Agency, which preserved the country's credit rating in extremely complex political and economic circumstances.

"It is also a reflection of the perception of the Montenegrin economy by respectable international financial institutions, but also the responsible and transparent attitude of the Ministry of Finance and the Government as a whole towards public finances. The above gives a kind of encouragement and a hint, that assuming the establishment of greater political and financial stability and the calming of global earthquakes, we will negotiate from a more favorable position on more acceptable terms in the future", said the Ministry of Finance.