Issuing €350 million in bonds: the pros and cons
After Business Today last Wednesday revealed plans for private firms and government to issue bonds worth in the region of €350 million, three leading economists – John Cassar White, Karm Farrugia and Lino Spiteri, share their views on the effect such bonds would have on Maltese banks and the economy
John Cassar White: The country is still flush with liquidity, but bonds could fuel inflation
Since banks are paying historically low interest rates on deposit accounts, many depositors are shifting their money into bonds. At the same time borrowing customers of banks are attracted by the availability of financing through the public and the stock exchange and are issuing bonds with varying lengths of maturities. The interest they are paying on these bonds is at times lower than that charged by banks to their borrowing customers. This is an added incentive to borrow directly from the public and avoid the bank intermediation. Of course the effect of this development on banks is that they are steadily losing deposits and at the same time they are seeing their lending being repaid in advance by customers who prefer to borrow from the public.
Karm Farrugia: Frequency of bond issues could be too heavy on economy
A permanent feature of our banking system has always been excess liquidity, chiefly the result of our ingrained savings habit, though recently it had changed direction with the economy heading towards a savings ‘conundrum’ - good growth in the economy resulting in a lesser rate of personal saving. The banks have perennially been flush with liquidity, more so since the orchestrated repatriation of millions of liri/euros at the time when the country decided to apply for membership of the european single currency. It is to the credit of our banks that they avoided the temptation to export our savings in search of high-yield, but very risky, bonds and other ‘ fancy ‘ securities. On the other hand it is to their debit that, in their greed to retain their margins between savers and borrowers, they disincentivised the former and, on several instances, were rather mean towards the latter. Banks in fact have been themselves encouraging bonds issues, regardless of their consequences on term deposits. They make money from commissions and management fees.
Lino Spiteri: Banks, economy will not be negatively impacted
Should that amount be offered to the public and is subscribed by it to a considerable extent, that would probably lead to deposit withdrawals.
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