KEEPING A GREAT FISCAL RESERVE IS A NEEDLESS EXPENSE
Krassimir Katev, First Deputy Finance Minister, to the BANKER weeklyFour months ago the Ministry of Finance announced its plans to restore operations on the open market by acquiring and selling government securities from and to the banks. This money supply regulation tool was blocked just before the currency board arrangement was introduced in 1997. Traditionally, government securities are traded by the central banks. The transactions represent a system of repo deals (acquisition or sale of securities with established repurchase agreement) through which money is either poured into or drawn from the banks. These transactions on behalf of the Ministry of Finance will be a kind of a fiscal policy too. Since 1997 the Bulgarian National Bank (BNB) has abandoned this policy, because the currency board is expected to balance the money supply. However, the ministry run by Milen Velchev does not look ambitious to replace the BNB, at least for the time being. More probably, the Treasury is willing to profit by some market distortions. Mr. Katev, you declared that the Ministry of Finance would interfere in the money market within a month and a half. Why do you resort to that measure?- We have been discussing this idea for a long time. We even talked about it with the International Monetary Fund (IMF). However, we first need to build an orderly system and to establish rules and risk limits for each bank. We want to avoid any liquidity problems that might arise on the interbank market.Do you mean the recent increase of interest rates on one-day interbank deposits above 30 per cent?- That increase lasted one day only. It happens sometimes, because banks are unable to make their calculations and are not ready to meet their payments from and to the budget. When there are such problems, the Ministry of Finance is allowed to interfere through repo deals - by crediting banks in return to government securities for a few days.Auctions will be held regularly in order to provide resources for three to six months. The aim is to raise the yield of the fiscal reserve in which the Government holds its free resources, to smooth the big liquidity fluctuations, and then the interest rates on the money market. The third aim is to stimulate banks to make longer-term deals on the money market. More than 80% of all interbank deposit deals right now are signed for one day. There are very few that are concluded for more than a month. Since the Bulgarian money market is not developed to such a great extent, we intend to encourage banks to trade for longer periods of time - three or six months. On the other hand, this will have at least a small effect on the money aggregates.Do you have any suggestions for the yield of the repo deals with government securities in which the Ministry of Finance will participate?- We always start from considering the yield we can rely on due to euro deposits abroad. It means that we'll ask for at least 4% yield on the repo deals, which is higher than the yield on euro deposits - 3-3.5% per annum.We shall only interfere in the market when this is economically advantageous for us. If the banks reach an agreement among themselves and offer a 2% interest for the money we launch to them for two or three months, we are not going to give them anything.Why do you expect banks which complain of superliquidity to be interested in these transactions?- They are interested in these transactions. Superliquidity is not their only complaint. They also suffer from the lack of long-term resources. If you take a look at the interest rates, you will see that one-day deposits provide 1.5-2% yields, one-month deposit rates are already above 3-3.5%, three-month rates are 4.5-5%, and six-month yields exceed 5 per cent. This should not be so. If banks do suffer from superliquidity, six-month interests should be 4.5 per cent.What will be the amount of government securities the Finance Ministry will trade?- It will not trade great amounts. It's remarkable that the amounts that move the market in a certain direction fluctuate between BGN50MN and BGN100MN. Liquidity crises are sometimes caused by deficits of BGN60-70MN. As a whole, the receivables of the Ministry of Finance due to repo deals in the bank system will not exceed BGN100-150MN. If banks begin to provide resources for three to six months at low interest rates by themselves, we shall leave the market. We'll only participate if this is necessary - for example, if the interest rate goes up to 20 per cent. Then we'll step on the market and will finance the banks in return to government securities at a 15% interest rate. We'll do so until the situation calms down.Do you mean that the idea for increasing the issues of government securities has nothing to do with the aim you pursue by repo deals?- Yes, this is an entirely different idea. It will be implemented through the issues planned by the Ministry of Finance, as well as through extraordinary issues which are to be announced in advance. Last year we had positive internal financing - the amount of the newly issued government securities exceeded the amount of the paid ones. It will happen in the current year too.The internal state debt, denominated in Bulgarian levs, compared to the total debt is just 7 per cent. Together with the ZUNK bonds it accounts for 10 per cent. This is a very low level, particularly when you keep in mind that we can lend on the domestic market in the long run and provide a lower yield than the one paid on euro bonds. We would be foolish not to finance in levs at a lower cost.Why did you say two months ago that the fiscal reserve would become practically insignificant?- These are natural tendencies. The fiscal reserve is used for debt payments. It is invested in deposits with the BNB, due to which we are paid interests similar to the euro deposits - 3-3.5 per cent. At the same time, if we run out of money we issue bonds for which we pay a higher yield. The maintenance of such a great fiscal reserve is a needless expense. The situation in other countries is different. However, it was an idea of the IMF to maintain a lowest fiscal reserve in Bulgaria. In practice, it did have a stabilizing effect. But when the privatisation is over, there will be no revenues to the fiscal reserve.Until then we should have reduced the debt considerably, we should have received a good investment credit rating which would allow us to finance ourselves advantageously. Thus we will enter the cycle in which many normal countries operate: each year they have a financing programme amounting to EUR1BN, EUR2BN or EUR3BN, which prevents them from keeping useless money at low interest rates.