State’s direct debt issuance cost at its lowest value ever

  • ECO News
  • 23 August 2018

If you gather treasury bonds, notes and bills, the state is subject to an interest rate below the 2% threshold, and it had never been this low until now. 

The Portuguese Treasury and Debt Management Agency (IGCP) announced on its monthly bulletin that the government will now pay a historic low under 2% interest rate on state debt’s issuance costs.

Portugal’s high public debt makes the country spend billions of euros in interest rates.

The cost of state debt issuance, however, has been decreasing each year, since 2014, as the following graph from the IGCP shows.

According to the monthly bulletin from the agency, between January and July, the average cost of the debt issuance was 2%, falling in January and August updated to 1,9%. It is the very first time that the burden associated with the debt was this low.

This fall goes hand in hand with a general downward trend in the market regarding the interest rates demanded by investors, affecting therein the debt issuance costs as in each moment the country resorts to the market, the interest rates are lower than before.

This dynamic is witnessed both in regards to the treasury bonds (long-term debt) and treasury bills (short-term debt).

On the 11th of July, the IGCP organized its first long-term debt bid of the last quarter. Q3 is a relatively calm period for the markets due to the vacations. The bid represented a profit of €950m for the government resulting from the reduction of the debt issuance costs. This is a direct effect of the ECB’s Eurosystem monetary policy strategy and improvement of the rating agency’s valuation of the economy, given the current GDP’s growth rate and decreasing deficit.

Treasury bonds have such a burden on the national economy that their particular value has significantly influenced the decreasing trend in the average debt issuance costs.

The savings certificates have been for a long period now presenting low interest rates as well, of about 0.6%. Short-term treasury bills’ interest rates decreased by more than a half.

Retail bonds pay much less interest at the moment as well, with IGCP’s deadline going up from five to seven years. Demand for these bonds increased, captivating around €1.7 bn.

Total cost “shrinks”, and shall continue lowering

The average state debt issuance costs have lowered this year, while the total cost of the national public debt shall shrink to 2.8% by the end of the year, accordingly to what Cristina Casalinho’s agency announced to investors.

The public indebtedness cost shall continue lowering, and if the decrease is confirmed, this will be the fourth consecutive year registering a fall in the average debt costs that currently stand at €246.7 bn, reaching the lowest value since 2010.

[Updated 16:34]