Tonio’s haircut

In euro zone parlance a haircut has assumed a very special meaning, as our Minister of Finance has surely learned by now - nothing to do with visiting a barber to enhance your physical appearance.  On the contrary, a reluctant agreement to bite the lender’s bullet and settle for an enforced hefty cut in what is due to you rather than risk losing everything if the borrower defaults.

This state of affairs needs to be viewed not only in relation to Malta’s exposure to the Greek debt crisis, and to the whole euro zone debt crisis for that matter, but also

( perhaps more importantly ) to the financing of the yearly government budget deficit :  a phenomenon likely to persist for several years despite past glib promises that by next year our fiscal boat should have already secured berthing in a balanced-budget port of call, with surpluses expected thereafter to help us gradually reduce the excessive sovereign debt.

Up to barely two years ago, the public’s response to the Finance Ministry’s launch of any amount of treasury bonds would have been overwhelming, at least twice oversubscribed.  If one wanted to invest, say, € 10,000, one was advised to apply for at least € 15,000, thus confidently anticipating an adjusting ‘haircut ’.

Even though then coupon interest rates were considerably more attractive than comparable bank deposits, there was never a BoV representative contacting you, explaining why you should seriously consider transforming your current short-term fixed savings into longer-term fluctuating bonds, as has happened recently.

Nor was there a press release afterwards from the Ministry boasting about the oversubscription as indicating full trust by the Maltese investors in the fiscal and financial stability in the economy.  This had always been a given: lending to the government was inherently gilt-edged - safer than the banks themselves.

But not this time, sadly.  The offer was a relatively small one: € 120 m plus € 60 m optional, totalling € 180 m.    At € 191 m the bids only exceeded the amount by 6%, not a safe confidence margin.  Talk of a current recession is nonsense:  savings during a recession normally increase, as evidenced by the heavy drop in households’ consumption spending during the past two quarters.  And half the bids came from financial institutions, always in agreement with the government to take on the slack when the going doesn’t appear to look good   - probably what happened this time.

And chairman-less BoV phones depositors to apply for the treasury bonds with coupons yielding as much as 4% if held to maturity for the long-term ones.  There is so much liquidity in the banking sector that BoV itself splashes out whole-page advertisements enticing people to invest in second properties, chiefly holiday homes.

And yet the Minister fails to notice a ‘haircut’ in the public’s lowering perception of solidity in lending its savings to the government.  Maybe he does, but prefers not to show it.  ECOFIN meetings must be keeping him focused on external problems.

We will need to wait for the next launch of treasury bonds to find out.  Coupon interest might then have to notch up a point, even if this hurts the deficit-reduction programme.

Unless, of course, there is a general election before the Minister would have to present the 2013 budget. 

Maynard