Selling bonds to households, easier if one understands the monetary system

Since the middle of October the Romanian government woke up to the reality around it: funding will be more expansive, if you find it. It has tried to push for some capital control (force banks to keep their current exposure in Romania) but it has not worked. The latest idea, which is in fact an old re-heated one, is to sell government bonds to Romanian citizens.

The media picked it up and it went shopping for views from “independent” economists/analysts. The one that caught my eye belongs to the Chief Economist of Raiffeisen Bank  and Head of The Fiscal Council. By the way, can he be both and how do we know when he speaks as one or the other? Nevertheless, here is a link to his opinion in Romanian. The essence of his message is that: selling bonds directly to households is a very good idea from any angle you look at it. Well, maybe on paper. Let’s see how this would work.

Before I go further I have to say that I am disappointed. Not in the political figures endorsing the idea but in the professional.  To me, embracing such a proposal as a solution shows that how the monetary system works is not understood in Romania.

As I wrote a bit much, here is the punch line: it is the same money supply, so selling to households directly will not improve your funding costs.

If you still want to read I go through few examples below. .

The Ministry of Finance (MF) announces an issue of bonds for a 3 year maturity. What do you think that demand would be from that? One possibility is to look at the amount of deposits in the banking sector for that maturity. Don’t bother, I’ll tell you: is zero. And the situation is similar for maturities above one year. In fact, most of the retail money are kept in deposits with maturities lower than 6 months. Thus, theoretically the MF could find a source of funding but would not improve its poor management of debt financing.

Now, let’s look at the yields offered by MF for maturities up to one year.  They are close to but below 7%.  What is the interest offered on deposits by local banks? I just looked at the main bank in Romania and their interest rate ranges from 5.2 for a 1 month deposit to 6.20 for a 12 months one. Obviously, the term deposit is not the best substitute (different flexibility for example) for a t-bill but it will do for this fast analysis. Also, some banks will pay more for RON deposits depending on their liquidity situation. But for the sake of argument we assume all banks pay similar interest rates for RON liquidity. Thus, based on yields it looks like there might be some funds available for the MF.

However, these money are already in term deposits at those banks. Taking them out will mean that people will lose the interest rate. Thus, to make it worthwhile either the MF will have to do a great timing job and issue bonds when most of those deposits mature or it has to pay a premium to cover the interest loss.  To make things even simpler, I only focus on the money already in the banking sector.  I do not believe future disposable income will be any help here. In fact, we should discount by 25% the amount available in deposits at banks as it might be used by households for current expenditure.

Assume now all of the hurdles I mention are passed. Then, it looks like if the MF pays the same interest to households as it did for banks there might be some validity to this idea. Still, there is one more thing.

The households will take their money out of the banks and buy bonds. This money will go to the MF which will pay bills. This way money will get back in the system but unfortunately not in the same distribution as before. This means that some banks that do not have accounts with MF for paying pensions or salaries for state employees will have to raise interest rates to keep/attract savings.  In fact, I guarantee you that banks will increase interest rates for RON liquidity the moment the MF will announce bond issues for households. This is the case of perfect foresight and it would be highly inefficient for them to wait. Why wait to pay more in the future when you can lock your savings for a bit more today?

As you can see, the idea might sound good but as usual only if you do not think about implications and implementation.  I do not expect the president to understand this but I expect more from “independent” analysts/economists. Just because we want to change the owners of our bonds it does not mean more money are magically showing up. The money banks use to buy bonds are the money people deposit with them. It is the same money!!! The only authority that can increase or decrease the money supply is the NBR and they should not increase it to finance the budget deficit.

34 thoughts on “Selling bonds to households, easier if one understands the monetary system

  1. Besides this logical and technical arguments, I have doubts that romanian citizens will not be reluctant to invest in something unfamiliar for them and giving up the bank deposits, even for slightly interest rates. Unfortunatelly, the investment horizon for romanian households is quite limited.

  2. If the NBR would have had a better inflation targeting reputation, then the current 3% – 2,5% inflation forecast would be taken more seriously, meaning that households could consider that future interest rates will fall, thus making bonds more attractive.
    External shocks ( via commodities: oil, gas, energy, or even food), or reckless monetary policy could send inflation sky high again.

    The way I see things, the MF needs a hand from the NBR for the bond issuance to work.

    1. Exactly. But that would mean indirect financing of the budget deficit, and that is a big no-no. Although, in this day and age it seems that all is ok, even if it will put a higher burden on future generations.

      1. Vreau sa cred ca nu ai citit cu atentie ce am scris in articolul respectiv si nu ca esti doar tendentios/rautacios/ frustrat gratuit.
        In primul rand, titlul nu l-am pus eu, l-au pus cei de la ZF. Eu le-am trimis doar textul. In text spun clar ca a vinde catre populatie va
        “diversifica baza de investitori, contribuind si la o cerere mai stabila de titluri de stat. In momente de volatilitate in pietele financiare, prezenta investitorilor de retail in titluri de stat poate fi un factor de stabilitate … In plus, poate fi si o modalitate de mobilizare a unor economii ale populatiei aflate in afara sistemului financiar (detineri de numerar), stiut fiind faptul ca in vremuri de criza astfel de economii au tendinta sa creasca.
        Existenta pietei de retail pentru titlurile de stat este o caracteristica standard pentru tari precum Canada, Germania, Austria (exista chiar o platforma electronica dedicata), SUA, Suedia, Ungaria, Polonia si recent Republica Ceha (au reintrodus acest produs incepand cu 2011).”

        Nu trage concluzia, fara nici un fundament in argumentatia mea, cum ca nu as intelege ca vorbim in mare parte de aceeasi bani. Eu am spus doar ca populatia ar crea o cerere mai stabila. In plus, s-ar mobiliza si sume care nu sunt in sistemul bancar acum (detineri cash ale populatiei), deci totalul finantarii (in plus fata de redistribuirea pe banci/populatie) pt MF ar creste. Te rog sa arunci o privire pe datele BNR sa vezi cum au crescut detinerile de cash din afara sistemului bancar in timpul crizei (banii „la saltea”), ca sa intelegi de ce vorbesc.
        Ionut Dumitru

      2. @Ionut Dumitru
        Imi este foarte greu sa cred ca la acesti bani, de la saltea, te gandeai sau se gendeste ministerul de finante. Pe timp de criza banii la saltea sunt pentru cheltuieli curente si sunt o caracteristica a tarilor cu impozite multe si mari.Sper ca te-ai uitat la evolutia venitului disponibil in Romania care nu arata ca si cum acesti oameni stau pe munti de cash. Ei au nevoie de cash pt cheltuieli, pentru rata la banca etc.
        In plus, in Romania ar fi interesant sa vezi daca nu cumva exista o corelatie foarte mare intre banii la saltea si economia subterana. POate gasesti ceva acolo.

        Adevart, acesti bani sunt in afara sistemului financiar dar fac parte din masa monetara. Ei sunt luati in calcul, iar daca dobanzile pe termen scurt nu i-au putut aduce la suprafa imi este greu sa cred ca vor iesi pentru a finanta bugetul de stat.

        In plus, sper ca nu esti serios cand compari pietele si gradul de intelegere al acestui produs in Germania, Austria, Canada, SUA sau Suedia cu ROmania. Iar cele trei tari din est iar nu pot fi comparate pentru ca toate au o piata secundara a obligatiunilor functionala. Mai mult, in toate cele trei tari exista o experienta de cel putin 10 ani cu produse similare oferite de sistemul bancar.

        Nu este nevoie sa spunem ca tot ce iese de la guvern este bun. Pana la a ajunge sa finantam deficitul si datoria cu banii cash ai popilatiei poate ar fi bine sa vedem daca populatia intelege in ce produs se baga. Altfel, peste cativa ani o sa fie din nou gasita vinovata ca in cazul imprumuturilor in valuta.
        Ignor, pentru moment comentariile tale la persoana mea.Vreau sa raman in sfera disctuiilor pe teme economice. Dar raman la intrebarea mea: cand ai analizat acest produs ai vorbit ca ecnomist sef al unei banci comerciale sau din pozitia de presedinte al consiliului fiscal?

      3. @ionut dumitru
        “ca esti doar tendentios/rautacios/ frustrat gratuit.”
        Ce limbaj de cartier are seful de la Raifeisen. 🙂 Poate ti-ai adresat apelativele chiat tie.

        “diversifica baza de investitori, contribuind si la o cerere mai stabila de titluri de stat.”
        Nu ar fi oare mai inteligent ca statul sa isi reduca cheltuielile si sa nu mai emita nici un titlu de stat? Si asa statul primeste banii de la contribuabili.

        Daca populatia ar intra pe titluri, finantarea ar fi mai ieftina iar politicienii ar avea inca un motiv sa cheltuie bani in acelasi mod stupid/risipitor pe care il fac acum.

        Daca statul nu se mai poate finanta, fara sa tipareasca bani, atunci va trebui sa reduca si mai mult cheltuielile. O sa fie practic fortati. Asa cum au fost fortati pana acum sa ia masuri de austeritate.

        ” In plus, poate fi si o modalitate de mobilizare a unor economii ale populatiei aflate in afara sistemului financiar (detineri de numerar), stiut fiind faptul ca in vremuri de criza astfel de economii au tendinta sa creasca.”
        Prin miscarea asta oamenii ar deveni mai dependenti de statul roman. Insa, omul de rand cu economiile la saltea e intr-o pozitie mai puternica decat cu economiile in titluri de stat. Are mai mult control asupra monedei, locului in care ii tine si banii ii sunt mai in siguranta decat pe mana unui stat falimentar.

        “Existenta pietei de retail pentru titlurile de stat este o caracteristica standard pentru tari precum Canada, Germania, Austria, SUA, Suedia, Ungaria, Polonia si recent Republica Ceha”

        Nu conteaza ce fac alte tari falimentare. Conteaza ce faci tu pentru situatia ta.

        Dintre statele de mai sus, Germania, SUA, Ungaria si Austria sunt practic falimentare. Depind de imprumuturi ca sa se mentina pe linia de plutire.

        “Te rog sa arunci o privire pe datele BNR sa vezi cum au crescut detinerile de cash din afara sistemului bancar in timpul crizei (banii „la saltea”), ca sa intelegi de ce vorbesc.”
        Asta e un lucru bun pentru populatie. Sunt de acord ca nu e un lucru bun pentru banci si nici pentru stat din diferite motive.

        E una dintre principalele probleme ale bancilor. Pur si simplu nu au acelasi interes cu populatia, adica cu majoritatea clientilor lor.

        Din acest motiv, cu timpul atat bancile cat si statele vor fi reinventate si o sa isi piarda masiv din putere. Locul lor o sa fie luat de alte institutii care imbogatesc lumea, nu care incearca pe diferite cai sa ia mai mult decat contribuie.

  3. I just read an article on ZF site about this subject and they dont say anything about inflation forecasts, neither policy makers, nor analysts. By the way, I wonder how many households are careful to protect their savings againts inflation.
    But another aspect I want to point out is that even though in a crisis the households tend to save much money, I dont think the romanian citizens are satisfied with the economic environment to be willing to lend the government. It is hard to raise taxes, implement austerity measures and after that to look for help at population. Maybe the citizens understand the importance of lending the state, but I am sure they are not willing to do in this conditions. So the ball is in the court of policy makers (ie NBR, MF).
    And for a little amusament, here is the first comment on the article in ZF:

  4. Si “by the way” (ca sa fiu in spiritul blog-ului), din rationamentul tau lipseste ceva fundamental….Dobanda la depozitele bancare sunt impozitate, in timp ce la titlurile de stat nu….
    Doar un amanunt….

      1. Un prieten mi-a semnalat postarea ta si mi s-a parut un atac la persoana mea mai degraba….Poate m-am inselat….
        Oricum, felicitari pentru blog….
        Apropo, ce-ai spune daca in momentul acesta sunt circa 17-18 mld RON la nivelul populatiei bani cash? Nu vorbesc din auzite, chiar am cifre credibile in spate. Iar cifra a crescut spectaculos in timpul crizei….
        In plus, trebui sa iei in calcul si ca bancile nu prea mai pot plasa bani prea multi la MF din motive de limite…
        In cazul Cehiei, in 2011 au reluat emisiunile catre populatie….
        Si… am vorbit doar ca economist simplu….Cred in mod clar ca ideea este fezabila….Nu va aduce sume spectaculoase in plus la finantarea MF, dar trebuie adoptata…

      2. Ionut, nu a fost atac personal, te cunosc de prea mult timp. Credeam ca putem discuta pe idei. Nu ma mira suma din afara sistemului financiar bancar. Dar e suma care finanteaza in mare parte economica la negru, deci nu cred ca ar ajuta bugetul. Mai sunt si costurile de distributie pe care statul trebuie sa le ia in calcul. Dar cel mai mutl cred ca nu se considera faptul ca oamenii nu inteleg produsul. Poate faptul ca nu sunt impozitate sa ajute putin, dar bancile vor specula imediat si vor suporta costul cu impozitele.

        Si sa zicem ca totul merge ok, tu chiar crezi ca se va putea finanta statul pe termen lung? pentru ca de fapt asta e problema. Pe termen scurt gaseste bani la banci.
        Eu cred ca se pune gresit problema. Nu ar trebui sa cautam surse de finantare, ar trebui sa vedem cum taiem cheltuielile si reducem datoria. Difictulatile cu finantarea ar trebui sa fie o binecuvantare.

        POzitia ta dubla nu ma deranjeaza. Dar mi se pare o solutie Romaneasca. Puteai sa spui nu si sunt sigur ca se gasea altcineva. Poate nu la fel de bun, dar macar era independent cu adevarat. Sunt prea multe situatiile in Romania in care oamenii sunt angajati in 10 pozitii in acelasi timp. Ideea este ca in aceasta situatie oricat de bun ar fi mesajul tau, el va fi intodeauna vazut cu putin scepticism – indiferent din ce postura il vei transmite.

      3. Stiu ca pe multi ii deranjeaza pozitia mea dubla… Insa te invit pe tine sa vii in locul meu la Consiliul Fiscal si sa stai acolo doar pe banii pe care i-ai lua acolo…Nu ai fii deloc fericit, crede-ma…

  5. Guyz, cred ca va certati degeaba :). Fiecare aveti si nu stiu daca aveti, dreptate, cumva.

    Populatia deja finanteaza datoria statului roman, prin fondurile de investitii si de pensii. Asta pe langa excesul de depozite din sistem, care merge in titluri.

    Din punctul meu de vedere sa implementezi un sistem online prin care eu, simplu cetatean, sa pot participa la o licitatie de stat, si ulterior sa pot sa imi tranzactionez obligatiunea pe o piata secundara, e o idee, e un pas in fata in ceea ce priveste dezvoltarea sistemului financiar romanesc, si salut demersul, dar stict ca esenta, deocamdata. Treaba asta poate fi o treaba buna, dar numai atata timp cat pretul a 1 obligatiune e destul de mic. Nicidecum daca ramane la cat e azi. Daca ramane la cat e azi, sistemul este destinat unor economicosi foarte high-end, noi, restul, ducandu-ne cu banii la BCR obligatiuni, daca vrem o diversificare a economisirii, pentru ca in continuare acolo ne vom permite 1 unitate de fond, dar nu ne vom permite 1 obligatiune, in mod direct. Ca si pana acum, de altfel. Si atunci, sistemul devine inutil, in nici un caz nu se adreseaza romanilor, ca masa. Avem fondurile de obligatiuni la dispozitie, daca vrem sa ne diversificam.

    Nu trebuie sa ne gandim numai la “incurajarea statului sa cheltuiasca”, si nici numai la … ce se vor face bancile cand vor ramane fara depozite, si cum vor evolua dobanzile? BNR n-are decat sa pompeze lei in piata sa tina dobanzile jos, si sa inceapa sa faca politica monetara, ca nu par sa fi facut vreodata.

    Daca vrem sa economisim/investim, si sa ne educam, ca popor, trebuie sa invatam sa ne diversificam detinerile, nu e musai sa ne tinem banii numai in depozit la banca. Tre sa ne gandim si la noi, la intersul nostru personal, nu doar la stat si la banci :).

    (Marturisesc ca n-am citit articolul in zf, si toata propunerea, pentru ca protestez impotriva zf, si nu-i mai citesc)

    1. @Lavinia
      De acord to ideea despre ZF, eu citesc doar titlurile.
      De acord cu diversificarea. ETC.
      Nu sunt de acord ca sa fie prezentata ca o idee de a juta statul sa se finanteze in acest moment. Trebuie vazut ca un instrument normal in economia de piata dar nu ca o solutie salvatoare.

      Referitor la BNR, nu ai citit nici ce am spus eu. Presumpuneam ca BNR isi vede de treaba si nu finanteaza indirect bugetul. Nu inteleg ce vrei sa spui prin pomparea de bani. Eu sunt de acord ca in acest moment conditiile monetare sunt cam restrictive dar depinde ce obiectiv ai cand vorbesti de a creste masa de bani.Chiar ma si scris ca sugrumarea ofertei de bani in 2008 a dus la recesiune. E nevoie de mai multi bani in piata dar trebuie vazut prin ce canal ii introduci.

      Daca scopul injectarii de bani este cresrea cererii agreagate atunci pOti sa cresti foarte usor puterea de cumparare prin reducerea impozitelor. Ce propoui tu este ca BNR sa ajute statul sa finanteze o datorie si un deificit prin emisiune monetara. Foarte periculos din pnctul meu de vedere.
      Nu exista niciun caz in istorie in care perioade lungi de bani ieftini nu au creat probleme- bule speculative sau infaltie.

      Eu nu ma cert cu Ionut. Dar nu sunt de acord cu el in aceasta privinta.

      1. Si eu sunt deacord cu fraza asta a ta: “Trebuie vazut ca un instrument normal in economia de piata dar nu ca o solutie salvatoare. ”

        De asta imi si pun problema: cat va costa 1 obligatiune, ce sanse am sa o tranzactionez in piata secundara (ar trebui sa existe o piata pentru emisiunile alea, nu sa le ia doar poporul, si atat), si ce sanse am sa-mi creez un portofoliu de obligatiuni, cu diverse maturitati, urmarind o anumita durata, sau urmarind sa fac imunizare in vreun fel? Fara asta, e un sistem defect, si eu m-am saturat sa introducem chestii defecte in Ro. Poate ar trebui sa incepem sa introducem chestii ok, de la bun inceput :).

        Si, evident, ar trebui sa aiba o probabilitate de default conform careia sa o putem vedea ca fiind risk-free, pe minunata obligatiune 🙂

        Eu tot timpul, in 100% din cazuri, prin pompare de bani vreau sa spun pompare de lei pentru creditarea companiilor. Oricum de asta avem nevoie, si asta e unica problema cu ratele de dobanda daca ar fi sa creasca. Nu favorizeaza mediul de afaceri romanesc cresterea lor. Asta ca sa ma intelegi, si sa stii mereu la ce ma refer :))

      2. Problema este ca nu merge canalul creditarii. In plus indicatorii de solabiliate s-au deteriorat pt companii daotirta scaderii pretului activelor si binneteles a costurilor mari cu finantarea. O reducere de impozite ar ajuta corporatiile sa fie mai “solvabile” din punctul de vedere al bancilor. In legatura directa cu balance sheet recession.

  6. Si, mai ales, mi s-ar parea decent daca Ionut ne-ar spune si nou ce parere are despre cum se faca managementul datoriei astazi, in Romania.

    Daca este la curent cu alte tari, similare noua, care in trecut au avut criza de balanta de plati (ca si noi), si care ulterior s-a transformat in criza de datorii. Si implicit ce rol a jucat maturitatea datoriilor statelor respective, distributiai datoriei pe maturitati, in crizele lor?

    Daca considera ca azi statul roman are o distributie pe maturitati oarecum potrivita avand in vedere viitorul foarte incert din urmatorii ,,, 3 ani, sa spunem.

    Ca poate inainte de a vorbi despre implementarea unor sisteme moderne, chestiune cu care sunt deacord, presupunand ca se face intr-un anume fel, ar trebui sa discutam putin mai mult despre importanta existentei unor titluri de stat in circulatie, a unei curbe de maturitati care sa aiba o distributie a sumelor pe maturitati oarecum potrivita, a unor scadente ceva mai indepartate, si cu niste sume in circulatie ceva mai serioase, si, in cele din urma, de ce nu, cat % din distributia bananiera a maturitatilor de azi se adauga in plus la probabilitatea de default a statului roman? Pentru ca tre sa fii complet nestiutor sa nu realizezi ca e irelevant cat e datoria in PIB, si ca maturitatile joaca un rol mult mai importand in probabilitatea de default a statului decat indicatorul ala, care nu spune nimic, de fapt. Si, totusi, Romania a imprumutat sa plateasca pensii si salarii, e greu de crezut ca ne putem sustine singuri datoria, din venituri.

    Again, sunt perfect deacord cu diversificarea economiilor populatiei cu obligatiuni de stat. Intrebarea e, cum o facem, si in ce masura obligatiunile emise de statuk roman sunt un risk free-asset, sub actuala politica de debt management?

      1. Doamne ajuta. As fi foarte curioasa sa aud mai multe pareri pe tema asta. Nu de alta, dar chiar mi se pare o tema de discutie.

        Managementul datoriei statului aduce atingere si unor alte chestiuni, precum capacitatea bancilor de a face managementul lichiditatii, sau capacitatea fondurilor de investitii de a face un management spalat, nu doar probabilitatii de default (desi asta din urma ramane un risc extrem, si, evident, trebuie avuta in vedere ceva mai serios). Intr-un sfarsit cred ca o gandire usor mai in amanunt a povestii ar ajuta in mai multe directii. Azi am o vaga senzatie ca suntem undeva la un nivel … gen banan :))). Poate e doar senzatia mea, nu zic nu. De asta mi-ar placea sa aud si alte pareri, venite de la oameni care sunt muuult mai sus decant mine. [Stiu ca o sa ma urasti ca nu sunt destul de formala pentru blogul tau, dar pe bune, chiar nu-mi vine alta expresie in minte :)))]

        Si, sigur, in conditiile unui alt tip de management al datoriei, idea diversificarii noastre in mod direct, cu obligatiuni, nu doar prin intermediul fondurilor, ar putea deveni o idee :).

      2. Regarding liquidity management at the bank level, it looks like in Romania banks do not even need a treasurer to do this.It seems that this job can be done these days by anyone. And all the regulators seem ok with it too. But when something goes wrong then is fault of some guy who was just taking orders. 🙂

    1. We are far away from having a good public debt management strategy…The issue is related also to the lack of long term saving in the economy (pension funds are too small still)….and there is no culture for long term saving in Romania. And also, we strongly need an independendent debt management agency, outside the political influence (like in the other “normal” countries)….The secondary market should be stimulated by the market players also, not only by the state…That is all from my side…I am not a fan of bloggs… We can continue the discussion face to face whenever you want…

      1. Ionut, unfortunately this is the same old shit we are really sick of hearing about. Plus, is really funny when a bank is telling us that we don’t have a saving culture. What did the banks do to create a savings culture, to educate us to save? Not much. Some did, some did by supporting the investment management vehicles, like Raiff, but, anyway, it was too little, and it is too little, because the bank didn’t have such an interest, they brought euro from abroad, anyway. The banks themselves they did quite nothing in this respect, no special attractive programs, or something alike.

        So we are far away from the state having a … at least OK debt management, but we wanna sell those bonds to the romanian people.

  7. And I certainly do support lower contributions in the name of the company, for the employees. Mostly, if not for both of them. I think 16% as a profit tax, and even wage tax, it’s ok, we can manage. But that contributions … they are a nightmare :).

  8. Thank you for keeping the forum as hypocrisy free as possible. Florin admits irony in his posts and sometime he is misunderstood and needs follow-ups. Therefore I’ll go for blunt acrimony in order to avoid further iterations.
    I see that the current post spans at least two economic themes: 1) the conflicts of interest and the blurred accountability alter economic reasoning and decision making and foster the economic propaganda while diminishing the power of checks and balances and 2) the lack of real involvement and the capture of debate on economic policy generate marginal weak solutions to big but solvable problems.

    1. The truth is that 4 out of 5 members of the fiscal council are influenced directly or indirectly by NBR (and not only at “philosophical” level). One is not independently judging (on/off) fiscal policy while still working for a supervised private bank. Even after the subtle irony of the Ministry of Finance, one policy should not dominate and supervise the others. The end result will be suboptimal for the well being of the nation the only benefit being a never awaking escape goat.

    In the current situation the idea put forth becomes an ad hominem argument only in conjunction with the weak rebut. Claiming “facts are an ad personam reasoning” is very low on the scale of arguments. As an adept of academic debate I suggest something more along the lines of Adrian Severin excourse on bribery. This way a lot can be justified and one can still be happy and brag about it. Claiming the greater good as the root for a certain position is a try, but not a great one. I consider though more honest the ones put forth by similar characters in similar situations ( for the way to establish similarities with another occasion ) such as ” It’s for the kids”, “big mortgage to service ” , “I want to be loved” , ” my esteemed ones are doing the same”. As an audience still without a polyhistoric grasp of the realities, we would even admit a hedging position: not being able to bet if a certain private company will still be around for long, keep close to the state apparatus just in case the things turn sour.
    I believe that while promoting ideas which can influence the economic policy and the accountability, preserving independence is paramount. Just being part of a propaganda machine is more damaging for the entirety of society than getting personal favors by using the budget of a state institution. I’m not so sure about the last one. But I am digressing.
    2. There is a plethora of solutions to fund a budget deficit and the limit is just mental restrictions and scarce sources of inspiration. The retail tbonds are a weak marginal solution to a big but solvable problem. I consider it on the grounds of expanding the ecology of financial instruments or lack of ideas for a 500 word article.
    There is a logic fallacy called hoc post ergo propter hoc. I risk being accused of falling for it but to me it seems that such a product is introduced now after the public fight with the banks and after mismanaging again the public debt. It sounds so similar with the economic mindset which triggered a control of tulip imports right after the Holand Schengen conflict.
    If the argument is just why not have it even if it will not solve the problem I agree . Of course the same reasoning could have emerged earlier last week rather than now.
    We had such an instrument for a while with limited success. With the current financing needs the impact will be even smaller.
    The diversification argument is already operating as a reader correctly pointed out via other vehicles than banks.
    There are funds sitting in cash denominated in both Ron and euro and this phenomenon didn’t emerge or accelerate yesterday. I doubt the quality of data from nbr and the cash related data was just discovered. The reason for my doubts is that despite such good data and flawless mental framework we systematically end up with distorted and behind the curve monetary and credit policies policies and farfetched forecasts. I do not consider that de decision process is flawed therefore the issue can only lie with the data.
    The money sitting around in the grey economy will not come out with the launch of such an instrument despite the mentioned benefits such as flexibility, costs, tax and yield benefits.
    The previous experience ( perhaps data is available with nbr on that) is that the largest chunk was coming from bank deposits. Such a move I bet will decrease the state funding via bills as the banks will decrease their exposure to tbills by more than the amount lost in deposits.
    With such large reserves and in the current mood the taxation differential will be matched by the banks or by the mutual funds. Bidding up or segmented pricing is a way to go but it will just confirm that the instrument is the result of a blunt retaliatory mindset.
    The limits of the banks were filled with club loans and private placements which were initiated by the same advisors as a way to convince the mfin not to tap the Eurobond markets in 2009 and 2010 more often and in larger amounts. This is one great idea after another but the same undiversified economic mind.
    Tenor wise the financial players can outperform the population by far, provided the market operations will not tease out the market participants.
    The same stickiness is being achieved via different routes and in the end rests with the credibility of the economic policies.
    Is the tax benefit just a sweetener to open a new market or an unfair way to compete for the same funds ? Or is it a desperate sign of debt mismanagement and lack of fiscal buffer to the point of sacrificing tax revenues?
    Crowding out is too elementary to elaborate on.
    I agree with Florin on the reaction of the banks. Moreover a badly promoted instrument can increase the speed of transforming retail Ron liabilities into FCY ones.
    In Romania we operate with a fractionary reserve system with a non instantaneous application.
    Other markets could have a different take due to their evolutive positioning. What the others are doing is not working without careful consideration in all situations. At a more elementary level we were unique in many damaging aspects including keeping high interest rates throughout a deep recession.
    Culture of saving is a long term process with a holistic flavor which should have started a while back and with architects of choice (regulatory agencies and institutions) working in that direction and not just free ridding the good times and finding excuses in the bad ones. One product as such should not even be mentioned without an articulated and encompassing strategy as distorts rather than crafts for the good.

    In conclusion such a product should be part of the general financial product ecology but the timing, rhetoric and the expectations attached are hugely misleading.

    1. Really insightful.

      Somebody is gonna hate you, and is gonna suppose you hate him :))))) [Nasol.]

      And unfortunately some of the things you say here remind us that we don’t like our own country :).

      For me is very funny when somebody imagines that another form of saving could get the black money out. What are the black money, first, and who owns most of them?

      If they didn’t come out with the already existent forms of investment/savings, I don’t believe in this theory. I think the next step in taking these money out is creating some sort of programs like “Prima Fabrica”, for instance, this could have more success in the issue. I think people could become more interested in when you tell them they could make some money, than when you tell them they could save some money, mostly that people owning most of the black money :)..

      I know people having some black money, making these sort of money, and I tell you for sure they hate you anytime you pronounce the word “state”, they would just laugh in your face, at best, and tell you some bad words, most probably, if you would tell them to finance that shitty thing named a state, that they hate. Most of those people are antisocial. For them, this system would not function, they will not even wanna think about. But at least some of them become more interested in when somebody propose a business to them. And I think their money should be the target money to be brought out to surface, as there are more money held by one person, so they could create businesses to add value for the country. And I bet you can’t do it with the gov bonds, they don’t even trust the gov.

      Regarding the propaganda, you can’t imagine how funny those people are. The NBR come in the media and tell people: you should do this, instead of that. They are incredible, I always wanna laugh … And after a while they come back in the media and say: oh, people, you didn’t do what you were supposed to do, you’re so lame, and you learn no lessons :))). Isarescu is like from the banana tree, really. I can’t prefer ron denominated loans only because you said so, when I’m looking over the monthly rate differential between the two of them. If you want me to take ron loans instead of euro loans, make the ron loans competitive. But those guyz are communists, they never understood how a choice-based system functions, they still believe that you can make the masses move in one direction … only because you told them so.

      I imagine they are making the same bet now, with the state’s bonds. They believe that they will go on TV and tell people to do it, and people will just do it.

      Let’s hope that not all the young men working around the communists were infested by this virus. That at least some of them still have the notion of: option.


      PLS, Lucian, be kind enough to update you blog with the articles you write on I don’t usually read the romanian media (I’m antisocial too =))), but I wanna know when you wrote something new, and read it, because you are the only economist in this country that I like and I admire. I’m really not interested in anything else on, sorry :DDD.

  9. Btw, somebody explain to the young people of this country :)) What does this mean? “In Romania we operate with a fractionary reserve system with a non instantaneous application.”

  10. Hi all

    If the bonds for households will have the 16% tax eliminated , most of the people will take the money from banksand from home and will buy

    From my point of view , is a very goods idea to have these bonds again on the market , even without that tax eliminated . Because I preffer to have other safe opportunitiesto invest , not to keep money in bank deposits , especially not romanian banks

  11. @bogdan
    I hope they will issue and you can save by investing in those bonds. In the meantime you can get exposure to the Romanian government by keeping all your savings in RON at home. This means you trust them to keep the value of your money constant over time. You can also try and look at BVB for the Romanian government bonds and buy some.

    You do not have to keep your money in a deposit in a bank. You can invest them in a mutual fund which buys government bonds. This way again you can get exposure to the Romanian government.

    Finally, by keeping your money in a bank deposit you indirectly invest in Romanian bonds as most of the Romanian debt is financed by local banks and part of the the interest they pay you comes from investing in those bonds.

  12. I’m at a different level compared to you Florin, or the other esteemed persons present on this blog. However, I’d like to comment on one of your paragraphs:
    “However, these money are already in term deposits at those banks. Taking them out will mean that people will lose the interest rate. Thus, to make it worthwhile either the MF will have to do a great timing job and issue bonds when most of those deposits mature or it has to pay a premium to cover the interest loss. To make things even simpler, I only focus on the money already in the banking sector. I do not believe future disposable income will be any help here. In fact, we should discount by 25% the amount available in deposits at banks as it might be used by households for current expenditure”

    The first argument does not hold. I don’t think anyone wrote that there will be a one-in-a lifetime opportunity to buy Romanian Tbills and people would need to rush to break deposits at banks. It’s effect will be seen within an year as deposits mature at banks.

    Also the second argument does not seem to be working. I don’t have at hand a link to the latest NBR report to show evolution of deposits of natural persons in the banking system but I recall it is slightly growing with a percentage closely related to the net interest of those loans. So overall, the deposit base is not decreasing by 25%, do you have any numbers to back this opinion?

    Beyond the above, I read that the conclusion of the people present on this blog is that issuing Tbills to population would be a good diversifying move for the Govt even if the overall effect on the market is limited. I fully subscribe to it and I am happy everyone is in agreement to that.

    1. @Florin
      Thanks for taking the time to read this space. You do not need to “undermine” yourself in order to introduce a point (i.e. reverse psychology). I am trying to have a space that challenges ideas not one that compares individuals.

      I agree that no one said it would be a one time issue but then again no one said otherwise. All I have to do my analysis is the historical behavior of the Ministry of Finance. Their attempts to “diversify” the pool of investors are peppered with one in a life time opportunity. Look at how they do the international issues, other attempts to diversify the pool of investors Also, look at how Italy is doing it today: buy a bond day. It does not look like it will be an ongoing program.

      Regarding your second point, was just a rough guess based on the negative real income and negative real growth of disposable income in Romania. I find it hard to believe that people who see their purchasing power dwindling due to economic policies will choose to use their cash to buy bonds issued by the same government. Maybe if those bonds are advertised as the good instrument versus the instruments offered by the BAD banks.

      However, I think the original point of my post is lost. I had an issue with the way the idea was presented: good from any angle. So, I wanted to show it has holes in it. Also, I do not see anyone concerned with the household who does not understand how a bond works. What are the risks involved and how to eliminate them, etc.
      These are important topics, especially when the message comes from the Head of the Fiscal Council and Chief Economist of a private bank. His message carries weight and I wanted at least for my readers to point out the possible conflict of interests.

      I hope the Romanian government is concerned more with cost and maturity than with whom is buying its debt. Using resources to sell these bonds to households every month will not bring either lower cost or higher maturity. And for the reason of stability due to a diversified investor base: 1) households will never own enough debt to rival the institutional investors 2) to have a stable bond market one needs good economic policies.

      My post here does not stop the Romanian government from issuing bonds to households. All, I can do is make sure that when my readers decide to buy them at least they do it after they assessed every angle.

    2. @Florin

      BTW, Ionut was given the opportunity to make his point one more time today in the same paper, mind you. I am not sure if this is because of what I wrote here. What it is interesting is that ZF does not offer space for a different opinion but has space for the same author to present his opinion twice on the same subject. Does this seem like normal way to present an idea to a public that lacks financial education and a history of dealing with these products?

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