In Lithuania, the state eats for all

  • 2003-10-23
  • By Steven Paulikas
VILNIUS - Though Lithuania may be unique for having the Baltics' largest bond market, investors interested in diversifying their debt portfolios are going to have to wait for some time.While the government has shown an enormous appetite for issuing debt

Ironically, with Lithuania's economy booming and its fiscal situation stabilizing, the country's sovereign debt rating has improved to the point that borrowing on international financial markets is now attractive not only for the government but for private entities as well. And once interest rates start to rise, companies might be tempted to go for longer money with some publicly traded debt.
For the time being, however, the government's appetite is enough to fill both foreign and domestic investors' need for exposure to Lithuanian debt.
At the close of the third quarter 2003, there were roughly 2.2 billion litas' (637 million euros') worth of outstanding debt issued by the Bank of Lithuania. And by the end of 2002 the country's total foreign debt doubled that of Estonia's and Latvia's together.
If bills issued soon after independence claimed a status only slightly higher than junk, recent bond issues have been accompanied by lower interest rates and longer periods of maturities. New issues are released for three to 10 years only.
"The maturation period has become increasingly longer over time. We have mostly eliminated the one-year bills," says Arvydas Kregzde of the Bank of Lithuania.
In early October, Lithuanian 10-year bonds were trading at 432 basis points, 150 basis points higher than similar German bonds.
According to Kregzde, the benchmark for Lithuania's public financial market is Germany's central bank, which the Bank of Lithuania hopes to emulate as closely as possible within the next decade.
Still, despite increasing budget revenues, the government appears unwilling to trim down its appetite for debt. Although negotiations for the 2004 national budget are still underway, top politicians have openly projected a budget deficit of roughly 2 percent of GDP, which will ensure a healthy quantity of debt for the coming year.
"While it is up to the government to determine the amount of debt to be issued, we believe that the amount of bonds in 2004 will not decrease," says Kregzde.
In fact, if it weren't for the current low-interest rate environment, nongovernment entities would probably find themselves squeezed out of the debt market by the public sector.
As of now no municipal government has entered the bond market. What's more, Vygintas Jakas, director of the economics department for the city of Vilnius, says that the Finance Ministry discourages local governments from issuing municipals.
"We don't issue bonds, and we don't plan on issuing bonds in the near future," says Jakas.
For now local governments manage to survive by borrowing from financial institutions that offer credit at rates significantly lower than investors would be willing to give on publicly traded debt markets.
"We borrow all the money we need from banks," says Jakas.
The intense competition in the banking sector has inhibited development in the corporate bond sector as well. With the exception of relatively small issues from the country's largest corporations, such as Lietuvos Telekomas (Lithuanian Telecom) and Lietuvos Dujos (Lithuanian Gas), companies currently see no comparative advantage in issuing any type of bond.
"The situation in the banking sector is so extreme right now that corporate bonds don't make sense for most companies," says Tomas Andrejauskas, an analyst with Hanzabankas.
"It's simply much cheaper to get credit from banks," he adds.
In Andrejauskas' opinion, municipal and corporate bonds will begin to appear in Lithuania once bank interest rates climb, yet this is most likely to take place slowly and over a period of many years.
"Government bonds are coming very close to European standards. While we won't see any quick changes there either, that's where most of the attention is right now," he says.