For the first time since 2013, Luxembourg has issued new government bonds. The issue of two billion euros had been prepared for weeks and has been officially confirmed by the Ministry of Finance on Thursday, January 26. This is a necessary step to co-finance public investments of 8 billion euros for the period from 2014 to 2017, according to Finance Minister Pierre Gramegna.
The bonds have a ten-year term and will expire in February 2027. The following financial institutions were entrusted with the sale of the 10-year bonds: Banque et Caisse d’Epargne de l’Etat (BCEE), Banque Internationale à Luxembourg (BIL), BNP Paribas, Bank of China, Deutsche Bank and Société Générale.
The reactions on the markets were very positive according to the Finance Ministry. Demand exceeded supply by 3.5 times. The subscribers to the bonds, as in previous cases, mainly come from Europe – 32% from the Benelux countries, 27% from Germany, 16% from France. The new government bonds are not aimed at private individuals. Investors are mainly banks, central banks and fund managers. This option is usually chosen because it allows to finance in the most cost-effective way, underlined the finance minister.
Pierre Gramegna (DP) is satisfied with the success of the operation, which he says is part of the responsible financial policy of the state. Three quarters of government investments would be financed through own resources, the remainder through bonds. The earmarked sum will be used for investments announced in the 2017-budget as well as for the reimbursement of expiring state-loans.
New debt of 600 million euros
The two billion euros are issued at a fixed interest rate of 0.625%, according to the Finance Ministry. This is the lowest rate at which Luxembourg has ever issued government bonds on the capital market. Gramegna admitted that the fixed interest rate was slightly higher than that in Germany. However, compared to most other European countries, Luxembourg seems to be better off.
Most bonds will not be repaid early, Gramegna said. A total of 1.4 billion euros should be repaid within three years. The new debt thus rises by 600 million euros. Total debt is currently rising from 20.5% to 22.4% of GDP. This would mean that government debt remains below the 2013 level (23.5%) and well below the 30% that the government set as a limit in its coalition agreement. In addition, the Finance Minister confirmed that the government had not recently entered into short-term bank loans.
The current total of Luxembourg government bonds now amounts to around eight billion euros. According to the Treasury, the new issue of the so-called “Luxembourg government bonds” was necessary to compensate two expiring medium-term bonds (2023 and 2028).
Government bonds are bonds issued by Sovereign States, in which the State acts as a debtor. Bonds are used to finance current government expenditures, including the reimbursement of existing government debt.