Öffentliche Finanzen: Inflation wird helfen, die Schuldenstände zu reduzieren

The bad news is that interest rates will rise, but the good news is that we are entering the eurozone, so the risk premium will be kept under control. The bad news is that we have borrowed more expensively, but the good news is that it is still cheaper than before.

Just like in some joke, we could continue this series of good and bad news because there is almost no segment of the economy that could not be described from both a positive and negative aspect.

But is the good news so much better than the bad, or vice versa? Do the negative aspects of the news outweigh the good ones? How does Croatia currently stand in the eyes of investors, and is the fact that we recently issued bonds worth 1.25 billion euros with a yield at issuance of 2.975 percent good or bad news? Does the announcement by Finance Minister Zdravko Marić that the era of cheap money is over mean that our debt servicing will significantly increase and that we will no longer be able to reduce the share of debt in GDP as easily as in recent years due to low interest rates?

We could have done a little better, but we did well – this could roughly summarize the conclusion of the economic analysts we asked to comment on Croatia’s recent borrowing, given that a yield of three percent was last recorded five years ago.

Unconventional Moment

– The recent issuance of Croatia’s ten-year eurobond in mid-April was far from business as usual. To begin with, the issuance was postponed multiple times. The eurobond was initially expected in the first quarter, but the issuance did not occur due to the outbreak of war between Ukraine and Russia and the high uncertainty it brought to the capital market. It is truly a shame that the Ministry was unable to implement that plan because we can assume that just before the outbreak of war in February, the bond could have been issued at a yield slightly above two percent, but it was ultimately issued at 2.975 percent. In the days around the issuance, the yield on the German ten-year bond, which serves as a benchmark, was at its highest levels since 2015, so it was probably not easy to make the decision to issue the bond in April either. This was certainly another unconventional moment – issuing under conditions of rapidly rising yields – said Kristina Pukšec, head of the Trading Department at InterCapital.

She explained that Croatia, in order to successfully place 1.25 billion euros, had to attract investors with a slightly higher interest rate than indicated by the secondary market. – The structure of investors we attracted under such conditions was also unusual – pension funds and insurance companies subscribed, for example, a very small share of the issuance, atypical for bonds with longer duration – notes Kristina Pukšec.

It’s Good to Have the ECB

It surely wasn’t easy for the Finance Minister to come out with bonds in April, as Croatia was the first CEE country (Central and Eastern Europe) to test the market after the outbreak of war and thus broke the ice after a strong rise in yields on the global scene. Given that today the ten-year yield is higher at 3.2 percent, the decision to issue the bond in April was a good one.

Have we borrowed favorably and how do we stand in the bond market, which has been quite lively lately, can best be seen in comparison with other countries.

– Before the pandemic, Croatian yields were regularly below Italian ones, but that is now a thing of the past. The Italian ten-year euro yield at the time of writing this text is around 2.85 percent. Eurozone countries simply have the ECB on their side, which, although moving towards tightening monetary policy, is still currently buying bonds from eurozone countries. Even when that ends in a few months, the ECB will continue to support them by reinvesting amounts from maturing bonds purchased in previous programs – explained Pukšec.

Rising inflation (globally), increasingly vocal rhetoric from ECB members about the necessity of tightening monetary policy, and risk aversion following the onset of the Russia-Ukraine conflict are key triggers for the rise in yields on the debt of almost all countries in the region, and Croatia shares a similar fate as those regarding yields and bonds. The ten-year euro yield of Bulgaria at the time of writing this text is close to three percent, Hungary around 3.50 percent, and Serbia around 5.70 percent.

For comparison, during November and December of last year, yields on Croatian ten-year euro bonds were 1.18 percent, and on eight-year kuna bonds 0.38 percent. In early February, the state issued an eight-year bond worth one billion euros with a currency clause and a yield of 1.39 percent on the domestic capital market, while in December of the previous year, the market yield on an eleven-year government bond with a currency clause was 1.05 percent.

Global Factors

– The rise in yields on Croatian debt is not due to specific domestic factors, but rather global ones, which the country can influence little. In this context, the recent euro issuance should also be viewed – said Alen Kovač, director of the Economic Research Sector at Erste Bank, adding that he sees the prospect of entering the eurozone and the favorable impact on the credit rating as positive factors in the sphere of borrowing costs.

In recent years, thanks to historically low interest rates, Croatia has managed to refinance old debts at significantly more favorable interest rates, which has also helped reduce the share of debt in GDP, despite the fact that nominal debt is now significantly higher.

Read the rest of the text in the new issue of the Lider weekly, in digital and printed editions.