The discussion of government debt is again on the agenda
In the last few days the discussion of government debt is again on the agenda, and its consecutive increase by the government of Boyko Borisov. The main debates are focused on the size of the new bond, its parameters and the way it will be spent. The widely publicized and shocking news of the new 16 billion lev loan with a possible interest rate of 10% quickly sets society against the Ministry of Finance and the hundred-day government.
To cover budget deficits over the next three years (3.3 bn. euros)
The question surrounds the medium-term program of the government to issue new bonds to refinance old debt (6 billion euros) and to cover budget deficits over the next three years (3.3 bn. euros). They have selected four leading financial institutions that will organize the issuance of the new bonds, depending on market conditions. The three-year duration of the contract for this series of issues and broad parameters will enable the optimization of the structure of the new debt depending on market sentiment. This is a new approach by the Ministry of Finance, which seeks the inclusion of elements with a greater degree of predictability for creditors.
This type of debt transfer from the private to the public sector can be seen in some ways as a positive step
In our case, this increase also reflects the fact that in the past year the debts of the financial sector were in the balance sheets of the government due to the bail out of the banking sector. This type of debt transfer from the private to the public sector can be seen in some ways as a positive step if we take into account the fact that governments can borrow more cheaply than companies or individuals and bring stability, which depends on overall financial stability. On the other hand, these growing sums are a warning beacon to anyone who has ever taken out a loan and then in the following years had to follow strict financial discipline to repay it.
The matter of issuing the new debt in the upcoming years is an inevitable move
This is due to driven by the maturing short-term debts of several previous loans and budgetary deficits. We cannot ignore the fact that over the past few months we observe falling interest rates on government bonds for Bulgaria, as they reached historic lows of 2.3 to 2.4% for bonds with 10-year maturity. This is a clear sign of the willingness of creditors to reduce the required risk premium and indirectly assess a positive financial situation in the country. For comparison we can go back to 2008 – 2009, when they were able to raise funds with an interest rate in the range of 6 – 8% by noting that the budget deficit for 2009 was 4.7% of GDP. Then again Bulgaria ranks highly in the EU with the lowest debt (14.7% of GDP), but the high budget deficit is one of the indicators that determine the higher degree of risk.
Planned budget deficits over the next three years will be the main topic for discussion
The main question today should be not be the amount of the loan, nor by whom or when it will be returned, but how to reduce the need for debt financing of future deficits. Planned budget deficits over the next three years will be the main topic for discussion and their failure should really raise concern. That is why we at MOVE.BG will direct our future observations and analysis in this direction. Inefficient and non-transparent budget spending will continue to be the main focus of our observations.
The government is demonstrating ambitions for large-scale reforms within the country – in the areas of health, the pension system, judicial and even in the long-awaited energy sector, but still in vague directions. For now, however, debts and intimidation are outweighing real action. We don’t cease to express ourselves, as citizens in this process because generating chronic deficits, albeit moderate, must soon give way to a better-balanced budget. The plans of the Ministry of Finance revealed exactly this gradual plan, to reduce the budget deficits after 2016. This, on the other hand claims, and means to us that at least by the end of this year there should be no updates on the budget. Otherwise we will witness a truly vicious practice of derailing indebtedness and other delayed reforms with increasingly little effect.
