Demand for Estonian government bonds proved to be strong: more than 100 investors sought to subscribe for over €2.2 billion in bonds, representing 2.2 times oversubscription. The purchasers are primarily banks, pension funds, and investment funds from European countries.

"The strong interest from many major foreign investors in our bonds shows that Estonia is viewed as a trustworthy country and a very safe place for long-term investment. This time, there were fewer speculative investors among the subscribers and a large number of long-term buy-and-hold investors," said Janno Luurmees, Director of the State Treasury at the Ministry of Finance.

What was new this time was that the bonds were issued under the Estonian legal framework; they are registered with the Estonian Central Securities Depository and will be listed on the Tallinn Stock Exchange. This change provides better access to government bonds for local retail investors.

The proceeds from the bond sale will be used to cover the general state budget deficit and to replenish the liquidity reserve. Given the projected state budget deficits in the coming years, further government bond issuances are expected in the future.

The bond issuance was arranged by DZ Bank, HSBC, and J.P. Morgan, with Swedbank acting as co-manager. The bonds will be listed on the Tallinn Stock Exchange.

National debt is rising

Aivar Sõerd, a member of the Riigikogu finance committee, said on ERR broadcast Friday that Estonia's national debt is rising rapidly, along with interest costs. Putting the brakes on borrowing requires major political effort, Sõerd added.

Sõerd pointed to Finland, where parties have a formal agreement to reduce the budget deficit similar to what Eesti Pank recently proposed, yet the country's already high debt continues to grow.

"Finland's public finances are in very poor shape: debt is very high and the deficit is large, and they haven't been able to stop it," Sõerd said. "Estonia needs such an agreement because the seriousness of the situation demands it, but I don't know whether politicians fully understand that."

A declaration that is not followed through in practice is pointless, added Sõerd, a member of the Reform Party faction.

He also noted that interest costs are growing at an alarming pace and are expected to rise from about €200 million today to €650 million a year by 2030. Estonia does have a budget strategy and must follow EU fiscal rules, he said.

"If borrowing continues at this speed, it will raise the country's risk in the eyes of bond investors. Loans taken cheaply in the past will have to be repaid with more expensive borrowing," said the former finance minister. "First we need to get the deficit down to three percent, but even at that level debt will keep growing."

The Ministry of Finance forecasts the state budget deficit will reach 4.6 percent of GDP next year.

Over the past six years, Estonia's national debt has quadrupled, and without changes it could exceed €20 billion by 2030.

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