Residents and enterprises feel the benefits of the adoption of the euro already in the first months
One hundred days after the adoption of the euro, the country’s residents and enterprises can already evaluate the benefits of the euro adoption in financial terms: cheaper credit, vanished foreign exchange costs and lower cost of transfers in euro.
“Despite different fears and troubled projections before the euro adoption, the first months with the new currency confirmed: the euro did not lead to a leap in prices, while the benefits it provides have already been taking a specific financial expression,” says Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
A positive impact of the adoption of the euro on the Lithuanian economy is already now being felt through interest rate decreases, defunct foreign exchange costs, and significantly cheapened cross-border settlement, access to the ECB’s credit resources. In the long term, the benefits will also be felt through intensified foreign trade; the single currency will positively affect foreign direct investment as well.
This gives a good additional impetus for the enduring growth of the economy and employment, as well as provides better protection of the domestic financial system from the likely negative effects of the geopolitical events in recent years.
The improving expectations about the euro adoption already last year significantly increased the country’s credit ratings: two of the three largest international credit rating agencies (Fitch and S&P) upgraded Lithuania’s rating from the medium risk grade BBB/Baa to the higher credibility A-grade with a stable perspective, while the third agency (Moody`s) established a positive perspective of the Baa1 rating. This was one of the reasons which determined lower borrowing costs both for residents/business and the state.
Banks’ average lending rates decreased from 3.78 per cent (in December 2013) to 2.90 per cent (in February 2015), while the differential from the respective euro area average has contracted from 0.80 to 0.53 p.p. over the same period. The yield on Lithuania’s long-term (10-year maturity) debt securities dropped from 3.69 to 1.20 per cent. Their differential from Germany’s bonds in euro, which are considered particularly safe, contracted from 1.89 to 0.90 p.p. in the above-named period and became by 0.55 p.p. lower than the euro area average, despite that at the end of 2013 it still was by 0.04 p.p. higher.
Banks and other payment service providers operating in Lithuania reduced the fees for cross-border settlement in euro to the current fees for domestic payments. In the estimation of the Bank of Lithuania, over the first quarter of 2015 alone, due to this, bank customers have already saved about EUR 6 million. Because of vanished foreign exchange costs, the non-banking sector, in the estimation of the Bank of Lithuania, in 2015 will save about EUR 50 million.
When Lithuania joined the euro area, the Bank of Lithuania provided a possibility for credit institutions operating in the country to borrow directly from the Eurosystem. This is an additional guarantee of ensuring liquidity of domestic credit institutions. Over the first 100 days following the euro adoption, banks operating in Lithuania used intraday and overnight credit against collateral facilities as well as the main (with a one-week maturity) and long-term (3.5-year maturity) refinancing operations. Banks currently operating in Lithuania have, by different operations, borrowed from the Eurosystem via the Bank of Lithuania about EUR 350 million.
Although there had been fears of a major leap in prices before the euro adoption, the most recent data show that these fears were excessive. The impact of the euro was marginal and — with a favourable turn in the circumstances — much outweighed by strong price reducing factors: with a strong fall in oil prices in international markets at the end of 2014 and beginning of 2015, fuel prices in Lithuania dropped strongly as well. This resulted in the fall of the overall price level. Price trends in the first months suggest that inflation in Lithuania on account of the adoption of the euro rose not more than in the countries which adopted the euro earlier, i.e. to 0.2–0.3 p.p.
The country’s commercial banks and the Bank of Lithuania over the first quarter have exchanged into euro free of charge slightly more than LTL 2 billion, Lithuania Post over the first two months — another LTL 829 million. Another almost LTL 220 million were taken to ATMs. A total of approximately 720 thousand exchange operations have been carried out. In the first quarter of 2015, LTL 5 billion returned to the Bank of Lithuania’s vaults, i.e. 43.2 million of banknotes and 209.3 million of coins, weighing respectively 43 and 541 tons.
“The process of exchange of cash litas into euro was and has been a success, while the amount of exchanged litas was in line with our forecasts. Until the end of 2015 residents will still be able to exchange litas at commercial banks, and, later, at the Bank of Lithuania for unlimited time”, says V. Vasiliauskas.
At the beginning of April, the total value of not exchanged litas in the market amounted to LTL 767.9 million (EUR 222.4 million), or approximately 13 per cent of the former value at the beginning of the year — LTL 5.8 billion (EUR 1.7 billion). The Bank of Lithuania has currently issued into circulation EUR 1.6 billion.