The Ministry comments on the article by Professors Stavros Zenios and Andreas Milidonis
The use of fiscal policy and public debt management tools to absorb liquidity from the banks may lead to the deconstruction of fiscal goals and the derailment of the strategic management of public debt, the Ministry of Finance says, commenting on an article by Professors Stavros Zeniou and Andreas Milidonis.
The article proposes to reduce the excess liquidity of the banking system by issuing government bonds, as a means to deal with the difficulty in raising deposit rates, in the wake of repeated increases in key interest rates by the ECB.
“Any attempt to absorb liquidity from the banking system and from the economy in general is doomed to failure and may lead to the undermining of other economic policy objectives if it is not done within the framework of a coordinated monetary policy which falls under the main responsibilities of the Eurosystem/Central Banks “, states, among other things, in an announcement by the Ministry of Finance.
In particular, he notes that the use of fiscal policy tools and public debt management policy to absorb a significant part of the liquidity may lead to the deconstruction of fiscal goals and the derailment of the public debt management strategy from its main mission, without even achieving the intended purpose for which liquidity absorption is attempted.
As stated, even if €2.5 billion of liquidity is absorbed (which we consider unrealistic to achieve for the reasons stated below) the excess liquidity that will remain in the system will be of such a size that no impact on deposit rates will is expected to occur, while at the same time, the public debt will be inflated by 10 percentage points unnecessarily.
“In addition”, notes the Ministry of Finance, “the public debt management strategy will lead to dangerous pitfalls since, on the one hand, Cyprus will run the risk of failing to issue bonds with all that this entails for the financing of its needs, for the credit ratings from the Rating Houses, and for the future pricing of its bonds at higher levels and, on the other hand, the international government bond market of the Republic of Cyprus will be destructured in the absence of any new European bond issue”.
< p class="text-paragraph">He also notes that these reports “have more theoretical significance”, since, as already mentioned, issuing on the domestic market such a large amount of bonds and concentrating them exclusively on domestic investors “is practically impossible ».
The Ministry of Finance notes that a bond issue may not exclude international investors. The non-participation of international investors can only happen by their own decision, which is the case when the particular bonds or the market in which they are issued is a disincentive for them. It is known that the domestic secondary market – for now – does not work efficiently.
