Government demands 120m euros – A two-year bond auction takes place on Monday

The Albanian government will request a 120m-euro loan in the domestic financial market on Monday. The instrument used for the debt will be two-year maturity bonds and the indicative coupon rate for the auction will be 1.8%.

On March 21, the government decided through a normative act to change the 2020 budget, dictated by the COVID-19 spread emergency. The normative act envisages an increase in the budget deficit by 73% compared to the budget approved at the end of last year. Part of the additional borrowing to finance the increase in the deficit will be done precisely through two-year bonds in euros.

The decision to finance part of the domestic borrowing with instruments in euros aims to use the free liquidity in the currency of the Albanian banking system, as well as the lower interest rates that borrowing in euros enables today.

Based on the data of the Bank of Albania, foreign currency deposits accounted for 52% of the total at the end of 2019. Lending to the private sector is showing a clear tendency to shift to the lek. The weight of the wallet in lek increased by five percentage points during the last year. This has increased the free liquidity in euros, which nowadays is a separate challenge for banks. Interests in the placement of the euro are negative, in real terms, and keeping the euro in a liquid state brings costs to commercial banks. Based on this logic, the Albanian government has decided to withdraw a part of the free liquidity in euros, which will enable even lower interest rates. Currently, the coupon for two-year bonds in lek is 2.25%, while the target coupon for euro instruments is around 1.8%.

Government borrowing in euros could also have a stabilizing effect on the exchange rate. The government is expected to spend the 120 million euros borrowed mainly by converting them into lek. This will increase the euro’s supply in the foreign exchange market and is expected to reduce the depreciating pressures of the euro that began after the outbreak of the COVID crisis and the closure of the economy.

SCAN

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