Currently we can report attractive conditions for municipal financing. “Blame it” is the current low-interest phase, which is indeed problematic to see, but for the public sector leads to even cheaper money.
On the one hand, with regard to the topic of “negative interest rates”, we are following the development around the (non-) passing on of the negative indicators, such as Euribor, Libor or the weighted average yield for government bonds (UDRB for short). The latter has slipped into negative territory since May 2019. In this topic, the municipalities are increasingly gaining the upper hand. For this we refer to our article from May 2019.
On the other hand, negative interest rates are putting banks under pressure in terms of the use of funds. Austrian banks continue to be heavily involved in the money-lending business. And these loans, unlike international banks, usually remain on the bank’s balance sheet.
What to do with liquidity?
The service business with the achievement of risk-free or low-risk service income was only intensively intensified in individual cases. This situation means that banks usually have excess liquidity. There are several solutions to this over-liquidity, with the listings listed below.
- Parking at the European Central Bank
- Lending to customers
The parking of money at the European Central Bank (ECB) costs the bank currently a penalty interest of 0.4%, which the banks now soon pass on a broad front with higher volumes to their deposit customers, much to the displeasure of customers. Soon, this penalty rate could be increased to 0.5%. And by the way, the penalty should actually boost bank lending …
Lending to customers is inherently risky. While mortgage and real estate financing has been pushed forwards so far, the regulator has recently pointed to a – despite the collateral provided by the real estate – too high risk appetite for banks in real estate lending.
It is even more difficult for banks to lend to companies. As the economy in Europe and also in Austria will weaken slightly, corporate profits will decline in the future. This can easily lead to a deterioration in the creditworthiness of companies. For this reason, every euro that goes to companies as a loan is analyzed well in advance by the bank and thus the lending standards are changed indirectly.
It therefore remains almost only the public sector as always creditworthy address for loans. Also, these loans by the bank must not be backed by equity. As a result, credit spreads for local government lending have fallen below 0.4% since the beginning of the financial crisis, or historically low since 2009. Even fixed rates are cheaper than ever (below 0.7% for usual long terms should not be a problem).
ongoing financial controlling including tendering service
How can you benefit as a community? It is essential that you have a professional support. We as FRC – Finance & Risk Consult are familiar with the market and are well able to assess which bank has liquidity at its disposal in order to take advantage of it.
Let’s go through your loan portfolio together and discuss appropriate measures. Debt rescheduling can also be a good remedy for negative interest rates. Our range of services for municipalities can be found here.
We are happy to help you. Contact us here.