The international financial market assesses the euro adoption in Lithuania with record-low interest rates
Lithuania’s long-term debt security interest rates in the secondary market reached record lows, and the euro adoption is one of the main reasons that drives the growing trust of the international financial market’s participants in Lithuania.
“The general direction of the market is due to the low interest environment in the global markets; however, Lithuania’s debt security interest rates are dropping more rapidly. This reduces the interest gap between highly secure debt securities, such as Germany’s bonds. Such changes allow us to confirm that the approaching euro adoption in Lithuania is one of the main reasons for the drop in interest rates, because the single currency will eliminate the risk of the national currency’s devaluation and diminish the risk of the country’s insolvency, as well as the associated risk premiums,” says Sigitas Šiaudinis, Head of the Monetary Policy Division of the Bank of Lithuania.
In 2014 the interest of Lithuania’s eurobonds in euro in the secondary market, from the beginning of the year, decreased by 1.6 p.p. — to 1.79 per cent — and were at a historically low level. The risk premium, compared to Germany’s bonds, from February of this year decreased by 0.7 p.p. — to 1.11 per cent.
In 2023 the interest of the redeemable securities in litas of the Republic of Lithuania, used to assess convergence, from the beginning of this year decreased by 1.3 p.p. — to the historically low level of 2.42 per cent.
The study performed last year by the economists of the Bank of Lithuania showed that the euro adoption will allow the country to borrow cheaper. Under the baseline assessment scenario, the average rate on government securities in the year of the euro adoption would decrease by 0.80 p.p.; the borrowing cost for the population and businesses would be about 0.50 p.p. lower than if the euro would not be adopted.
Lower interest rates in the medium term (2015–2022) would allow saving LTL 3.9 billion in interest costs. 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.