2014-01-13
The difference in the debt prices of Lithuania and Latvia reflect the benefits of euro adoption for our neighbours
Financial market participants assessed the adoption of the euro in Latvia and now are prepared to lend to this country for a historically low price. Lithuania is seen as a more risky neighbour and subject to higher interest, even though recently the assessments were the opposite.
“It is obvious that our neighbours for a long time have been benefiting from the euro adoption — the assessments of the market participants created preconditions to borrow cheaper in international markets. Although the economic indicators of both countries are similar, the interest of Latvia’s debt securities in euro since 2012 has been less than in Lithuania,” says Sigitas Šiaudinis, Chief Economist at the Economic Research Division of the Economic Department of the Bank of Lithuania.
According to him, such assessments could be a result of the neighbouring country having already in 2012 decided on the euro, carrying out the adoption criteria and finally adopting the euro.
Lithuania’s and Latvia’s 2018 interest of redeemed Eurobonds
Lithuania’s Eurobond interest is approximately 0.8 per cent more than Lithuania’s, although in 2011 the trend was the opposite
The 2018 interest of Lithuania’s redeemed Eurobonds at the end of last week amounted to 2.08 per cent, while that of Latvia’s debt securities was 1.32 per cent, i.e. 0.76 percentage points less.
The Bank of Lithuania’s study of the euro changeover’s quantitative impact showed that the average annual interest for the Republic of Lithuania’s government securities would decrease as much as Lithuania and Latvia’s Eurobond interest now differs — in total, about 0.80 percentage points. For residents and businesses the borrowing price would be 0.49–0.56 p.p. less than if the euro would not be adopted.
Lower interest rates over the medium term (2015–2022) would allow saving up to LTL 3.9 billion in interest expenditure. Residents and businesses would have the majority of these benefits (up to LTL 2.3 billion), while the other half (up to 1.6 billion), due to reduced debt servicing costs, would be saved by the state budget.
Another indicator of the country’s credit risk — the credit default swap interest rate index — indicates that Lithuania’s financial market is assessed as the most risky among the Baltic States. Lithuania’s CDS last week amounted to 119.86, Latvia’s — 114.01, Estonia’s — 62.34 (a larger indicator shows higher risk).