‘Popular’ bonds carry hidden risks
Savers have only a few options to maintain the value of their capital in a country with high inflation; the best one is to invest in a long-term prospect in order to achieve a better average return over time. However, the main thing to understand when talking about savings is not the return on deposits, but the size of the capital accumulated after meeting actual living expenses. It should be clear that the prevalent economic model favors the spending of incomes – without this meaning the annihilation of reserves. But long-term investment, too, is based on an entrepreneurial spirit; in the form of specialized financial products or of the assumption of entrepreneurial risks, alone or collectively, by buying shares or mutual funds. So, the prevalent model requires well-trained investor-consumers. Indisputably, only a small segment of this country’s population has such training; it is no coincidence that many of those who justifiably – but for the wrong reasons – complain about banks’ low savings rates behave imprudently. They keep many accounts in many different banks, for instance; they let the outstanding balance on their credit card grow while taking care to boost their savings in the bank, and they spend no time learning about new bank products. But reality also has another side; a significant part of the population has small or medium-sized savings and is in no mood for getting involved in complicated relationships with banks. It is for this reason, as aides of Economy Minister Nikos Christodoulakis say, that he will go any lengths to promote a form of investment that will guarantee the small saver elementary protection against erosion by inflation. This practically means that such an investment product will have to yield a little over 3 percent after tax. He has three options. First, he can abolish the tax on deposits up to a certain sum, or reduce it for those investing in government bonds, depending on the length of time they are held. Bankers are in agreement with this option. Nikos Karamouzis, alternate managing director of EFG Eurobank, proposes «special long-term bonds that strengthen and reward national savings.» Petros Christodoulou, money market manager of National Bank favors «tax returns to those that keep bonds until maturity.» The second option is to encourage commercial banks to raise their deposit rates. New, small private banks, such as Hellenic and Omega or cooperative schemes already do this. The third option is a relatively large issue of two-year treasury bills, tax free and with interest paid upon maturity, which must offer a bonus of around 0.30-0.40 percent to remain on par with inflation. It is unlikely is that any such compensating product for the mass of savers will offer a return of 1 percent above inflation. The government can theoretically opt to transfer resources from taxpayers to savers. This would be a clearly political decision and would be accompanied by serious and multiple risks. Improved management of the huge public debt in recent years has brought considerable benefits. Already, the government has borrowed at the historically low rate of 3.5 percent for five years, while three-year bonds offer just 3 percent. A political decision to offer equally high rates to savers for shorter periods can create a serious upheaval in the market, at a time when the government needs to borrow 14 billion euros by March in order to recycle public debt without problems. If, again, the government seeks to offer a limited «popular» bond issue, it will create a bigger political problem than the one which Christodoulakis is trying to deal with. It seems likely that the multitude of investors will be offered the opportunity to invest up to 1,000 euros. Assuming that the spread between the rates of these popular bonds and those offered by bank savings accounts is at about two percentage points, the annual benefit to the small saver will be just… 20 euros. If again, the government opts to issue a bigger number of bonds, this will drive up the rates of all government bonds. The cost to the state budget will be difficult to bear and taxpayers will ultimately pay more than they have received in interest. It is evident that the best solution is to battle for lower inflation while people manage their savings as intelligently as they can.