Light and shadow of internal debt

02/06/2011 Babken TUNYAN

The state debt is the most favorite theme of economic journalists. But the main attention is drawn on foreign debt. The theme of internal debt is being slightly ignored.

And the articles on internal debt mainly contain one important criticism directed to the high-level profitability of state obligations. Both journalists and individual experts mention that the high-level profitability of state obligations causes a situation when it becomes more profitable to buy those for trade banks (that is lend money to the state) and quietly wait for the return of interest rates and expected amounts. It means by including expensive money the state solves its issues (it finds money for covering the state debt and budget deficit) but on the other hand the investment resources are slightly ousted from the market. Yesterday the head of state debt department of the ministry of finances Arshaluis Margaryan met with journalists to explain that in our country state obligations are not expensive at all and cannot ban the process of actual investments in the country. For this purpose the ministry has prepared information sheets for the journalists with certain statistics and interpretation. According to the minister it is pretty dubious when they say that the state obligations in our country are among the most expensive in the world. First of all, he thinks it is not very appropriate to compare with Europe and US because they have a higher level of econ0mic development and history of market economy. As of other comparisons with states, which have a similar economy with us, then we have a decent price for obligations. “For example in Azerbaijan the internal debt market doesn’t exist as such because up until now that country wasn’t able to get rid from the soviet legacy of state interference with the market and businesses. What we have in the internal market of Georgia may be compared with the 90s of Armenia when the release of 9 or 12 obligations was considered a big success,” reads the ministry information sheet. In particular, by mentioning Georgia’s example Arshaluys Margaryan responded to the half-serious observation of journalists as to which perhaps it’s worth not releasing obligations for awhile. According to Margaryan it is wrong to shut down the market, which has been formed for many years and start of over again. The head of the department mentions that in Armenia more obligations are being released at one release than in Georgia within a year. Moreover, if in the 1990s there was little trust to even 12-month obligations now we have a clear demand to even 20-year obligations. For comparison let us mention that if 1995 state obligations in the amount of 750 million AMD was released that currently we have 115 billion AMD and 30.1 billion of which was directed to financing the budget deficit, 15, 4 billion – debt acquittal, 79 billion – acquittal of previous obligations. According to Margaryan, the increase of the ratio of the internal debt within the state debt is desirable and the state gradually moves to that direction (as of the end of 2010 the state debt of Armenia was 3.8 billion USD, 500 million out of which is formed at the expense of the internal debt). And this in fact means inclusion of resources at the expense of the actual segment of the economy. The journalists blame the ministry of finances for that. When alluding to these accusations, Margaryan once again assured that their interest rates are not high at all compared to loans and deposit interest rates. The interest rate of short-term loans teeters within 9% in the case when the trade banks provide loans with 14% interest rates. Moreover, the effect of state obligations is not that big on loan providing. On the other hand, judging from the volume of advertisements offering loans our banks do not actually have problems with loans. It is no secret they are not interested in executing their main function in crediting the economy. But this is a different theme now and doesn’t link to the ministry of finances. Moreover, Margaryan says, “We would be happier if the whole money went to the credit market as it would increase the inflow of funds to the state budget.”

The ministry of finance in its information sheet also adverted the attention of the journalists to the fact that there are a few players in the market, which is a problem and never deserves the attention of the media. It means that 90% of the state obligations are distributed among trade banks of Armenia. If it is easy to participate in the auction of short-term obligations and only a petition is enough then for the mid-term and long-term obligations the process is more complicated and the requests are being thoroughly examined. They might be refused as well. As of now in the prime market only seven trade banks of Armenia can buy mid-term and long-term obligations. Besides the banks only one private company participates in the auction. In the words of Arshaluys Margaryan it would be great if the ratio of banks in the obligations market reduced so that the market would become diversified. But the abovementioned information doesn’t necessarily mean that besides banks the private companies are not interested in purchasing state obligations. In fact about 7-8 investment companies of Armenia have a very high interest in the obligations market but they do it in a solicited way – through banks. Roughly said, they order the banks to buy obligations. The bank buys the obligation and then adds to that its interest rate (usually 0.05-0.1%) and then sells it out to companies. According to Margaryan, this commonly used mechanism shows that weak banks show great turnout in the state obligation market. And why don’t the investment companies directly buy obligations without the solicitation of trade banks? Because the Central Bank has very strict requirements and the most part of Armenian companies are not able to meet these requirements and standards and thus are ousted from the process of direct purchase of obligations. It turns out that the Central Bank artificially reduces the number of participants of the market. It creates obstacles and bans the process of diversification. Margaryan doesn’t agree with this observation. In his words, CB insures the market from adventurous companies. As they say, there can’t be two good things at once.