As the Slovak government tries to come to grips with the country's burgeoning budget deficit, officials at the Finance Ministry are willing to pay more than 20 percent interest on treasury bills (T-bills) to replenish the budget, leading some analysts to question whether the strategy points to a poorly-constructed budget in the first place.
"At the last [auction of T-bills], we got a high of 22.5 percent [interest] and we can expect the rates to hit 25 percent [in future auctions]," said Dalibor Černička, the managing director of Money Market Brokers brokerage company. The rise has been substantial, as rates were 6.5 percent rate in early 1996 and only 12.5 percent last January.
"It poses a question whether this is only a temporary development or a badly constructed budget," Černička continued. "In my opinion, it's the latter." The budget deficit at the end of July was 18 billion Sk, almost half of the planned deficit for all of 1997. With past years showing that the deficit tends to balloon in the last quarter of the year, this indicates that the budget
Surprisingly, even the government's economic honchos might be voicing the same question, albeit in a veiled way. Peter Staněk, the Finance Ministry's state secretary, told the Pravda daily at the beginning of August that "the current deficit is really at the brink of sustainability. Already last year, I was very adamant about not planning the deficit higher than Sk 25 billion," Staněk said. But the government pricked a deaf ear to Staněk's warnings, projecting the actual deficit fifty percent higher, at 37 billion Sk.
"We have to openly declare that under the current circumstances, we will not be able to refinance the ongoing deficit," Staněk said. But others, like his boss Sergej Kozlík, the finance minister, who is responsible for the planned budget, were more defensive. In another interview for Pravda, he labeled the criticism as "bundle of half-truths and innuendos."
It is a hard fact, though, that the collision of the government's expansive fiscal policy and the tight monetary policy of the National Bank of Slovakia (NBS) has been sending all kinds of interest rates into the stratosphere. It is also a hard fact that the budget itself is in trouble. There is already 10 billion Sk less in collected corporate income taxes than projected, much of that attributed to major banks' restructuring and many major Slovak companies' disappointing half-year profits.
But there is one other, particularly unpleasant fact for the government. After passing of the corporate revitalization law, many companies who applied for state aid simply stopped paying taxes and other benefits, expecting to be revitalized (See story on this page).
Gov't securities issued abroad
To alleviate the burden, the Finance Ministry devised a plan to make up for the uncollected taxes. "We are going to allow both companies and people to buy government bonds," the ministry spokesman, Jozef Mach, said. "We are also going to issue crown-denominated government securities on foreign markets."
By letting players other than banks get into the market is a smart move, according to Černička. But he does not think foreign buyers will be queuing to buy the bonds. "After the May experience with the NBS shutting them [foreign speculators] out [during the currency crisis], they are going to be cautious," he said.
The other part of the ministry's plan is to tax yields from government securities which have been exempt from being taxed so far. But this idea may backfire. Before, market players used to take the tax advantage of T-bills by deducting those yields from their taxes. They may cease to buy T-bills now that this new tax has been introduced. Therefore, the only profit for the government could come from T-bills and bonds sold before that point. So what is the trade-off for the less than 1 billion Sk that the ministry says can be collected this way?
"Security," Černička said. "No one is sure what the tax is going to be, what is ahead. There is also one other factor - lots of T-bills and bonds are now maturing." The fact that the government must pay out for matured bonds at the same time that it is seeking liquidity has pushed interest rates to its present frightening levels.
Too frightening for the NBS, it seems. After months of refusing to pump liquidity into the market pool, the NBS suddenly changed its mind in the first week of August and dumped three billion Sk into the banking system within three days. The interbank rates (rates at which banks lend to each other) obediently fell from the low 20s to the mid-teens. But the rates for government bonds stubbornly stuck at 18-20 percent which means that the government now has to pay more interest on its debts than the banks.
Governments are usually the most reliable debtors and therefore command the lowest interest rates as a risk-free investment. Therefore, when the banks can get a better deal from each other than the government can, something must be wrong.
"It's amazing," Černička said. "If you add the tax advantage, you get a rate differential of more than 10 percent. It's a paradox."
"Because of the uncertainty about the tax and the ministry's other plans, there are not too many [bond] takers," Černička continued. " But the [government] needs the money badly enough and is willing to pay 20 percent. And, obviously, the banks' attitude is - if it is willing to pay, let it pay."
Assessing the government's determination to finance infrastructure projects, such as highway construction, with money this expensive, Černička said bitterly: "These guys don't seem to care whether it's 10 or 20 percent."
11. Sep 1997 at 0:00 | Miroslav Beblavý