Myths and realities about the planned ‘people’s’ savings bonds

Until the mid-1990s, it was common to see masses of people queuing up at the Bank of Greece, waiting to buy treasury bills and government bonds, thereby creating a broad base of bondholders. At that time, interest rates were still in double digits, yields from government paper satisfactory and the stock market starting to attract more retail investors. The big bond spread together with ballooning public debt led to the imposition of a 10-percent tax on bonds in 1994-1995. Pressured by difficult public finances, especially growing debt, the government had already started lengthening its debt. For this reason, it started issuing long-term paper such as five-year and seven-year bonds so as to avoid the nightmare of a massive debt and the difficulty of servicing short-term debt. Current Economy and Finance Minister Nikos Christodoulakis, who was then the deputy finance minister at the general accounting office, decided to set up the debt management agency, making it responsible for handling the country’s debt. In 1994, the government imposed a tax on repos, although this was abolished in 1998, leading to a significant shift of funds into repos. Nearly 29 billion euros were deposited in funds. In 2002, a 7-percent tax was reimposed on repos, resulting in the reduction of funds going into repos, although not as much as feared. This could be because savings interest rates were already falling. After the European Central Bank slashed rates in December to 2.75 percent, savings interest rates have fallen even further, resulting in real negative yields after deducting inflation, which continues to exceed the eurozone average. The unfortunate development, which led to much fuss and strong reactions, was the banking sector’s happy acceptance of falling interest rates due to the constant pressure on their share prices and the huge drop in profits. In this case, the finance minister, although a technocrat, could not ignore his political leanings as he saw an opportunity to exploit the issue politically. Seeking to establish a foothold among small savers, he brought back special one-year, tax-free bonds which have a premium reaching on the average 0.5 percent. This is how savings bonds came about. It is interesting to see how the issue will develop and the arguments for and against savings bonds. Many said a fuss was been created over nothing, while others claimed that the populist measure will not bring any real benefits to small savers as the additional yield offered by the savings bonds can only come from taxes paid by the same people. Banks in turn saw additional costs from offering bonds in their outlets. They said people will jam branches for something of doubtful benefit. One can only wonder why this big conflict emerged over savings bonds if there are so many doubts over their benefits. Banks said the bonds go against market and competition rules. In this case, they said the government is distorting competition. And maybe this is the crux of the opposition, as it opens up the issue of banks’ pricing policy which they have been used to. Anyway, fears that bank savings could be diverted to the new savings bonds are probably exaggerated. A total of 2.5 billion euros of annual savings bonds will be offered to the public against the government’s total borrowing needs of about 35 billion euros. Bank savings at the end of 2002 totaled 100 billion euros, of which 60.6 billion were deposit savings and 28.5 billion time deposits. The new savings bonds therefore are equal to 2.5 percent of total savings and 4.2 percent of deposit savings.

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