How much will banks have left for lending after they fuel the state budget with e1.4 bln?

Publish date: 27-11-2009
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Commercial banks yesterday purchased €1.4 billion in euro-denominated state bonds, with maturity of one year, at an annual interest rate of 4.25 percent.

The auction attracted 13 banks, who offered €1.759 bln, but the Ministry of Finance accepted only 81 percent of the amount which lenders were willing to invest. "The interest rate of the issue comes as no surprise, as the maturity is also low. But the amount is somewhat of a surprise, because [the Ministry] attracted funds above the level released by the central bank from the cash reserve ratio on foreign currency liabilities," said Nicolaie Chidesciuc, Chief Economist of ING Bank.

He added that the state could further borrow by the end of this year, through a six-month "club loan" agreement, at an interest rate of less than four percent. The attracted amount is nearly three times higher than the level initially auctioned, of €500 million, and is destined exclusively to financing the budget deficit. According to the Ministry of Finance, the state budget registered a deficit of RON 25.5 billion in the first ten months of this year, the equivalent of 5.1 percent of gross domestic product (GDP).

The auction organized yesterday by the Ministry of Finance is the third this year in which euro-denominated state bonds are sold. In the previous two auctions, the state attracted more than €1.2 bln, at a coupon of 5.25 percent per year, but at medium-term maturities, of four and three years, respectively.

"The 4.25 percent interest rate is a good rate both for banks and Finance [Ministry]. The attracted amount reflects the Ministry of Finance's great need for financing in this period, but also the willingness of banks to invest their euro funds, considering that opportunities existing on the market for investment are quite limited. The one-year maturity reflects the fact that Finance [Ministry] is confident that the economy will recover, which will allow refinancing at a more advantageous rate," said Otilia Ciotau, Chief Economist of Piraeus Bank.

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