“Excess” of dollars to be taken from the public

A bill has been tabled in parliament that provides the government with the right to issue treasury bonds in foreign currency. Interest and principal payments on the securities will have a foreign currency option as well. The Ministry of Finance is projected to be the issuing authority on behalf of the Cabinet, so the act, should it pass the house, will allow free rein to the ministry regarding the sale of foreign currency denominated domestic government bonds to the public.

The bill contains proposal to insert into the Law “On Securities and Stock Market” a new paragraph allowing treasury bills (the kind of government securities that may be sold to natural persons) to be denominated in foreign currency. In an explanatory memorandum to the bill, it states that its adoption will help mobilize household savings for investment into the economy of Ukraine, and thus improve the balance of payments through the sales of bonds. Foreign currency denominated bonds sales to the public will simultaneously solve two of the country’s problems: the chronically negative balance of payments (excess of imports over exports) and the absence of reliable sources of international loans.

So the government set its sights on the foreign currency savings of the Ukrainian public that are now sitting tight under mattresses. Experts estimate that this foreign currency stockpile amounts to 20 billion dollars! How will the government initiative impact the financial market and what is the likelihood that the public will take the government’s bait and turn to the bonds to protect its foreign currency savings? Below, The Day’s experts respond to both questions.

Viktor SUSLOV, former Ukrainian minister of economy:

“I feel ambivalent, like that son-in-law from a popular joke where he sees his mother-in-law falling into the abyss and taking his car with her. On the one hand, the decision to issue domestic government bonds in foreign currency is a signal there is a risk of devaluation expectations, which seem to be shared by the government in general and the Ministry of Finance in particular. On the other, I feel positively about the government’s decision to take care of protecting foreign currency savings of the Ukrainians. The mechanism proposed is an effective one, even in the case of hryvnia’s devaluation. However, in my opinion, any action that strengthens distrust of the national currency is wrong. Foreign currency denominated domestic government bonds issue will be just such action.”

Oleksandr OKHRIMENKO, president of the Ukrainian Analytical Center:

“The financial market will not be affected at all. Even if the bonds issue will happen, chances are the public will not buy them. Why? They already have a clear and reliable way of savings protection, that is, bank deposits. What an average person needs? To come to the office, sit down at the table, make a deposit, sign the papers, then come to the cash desk and collect their interest. Average Ukrainian neither knows nor understands how foreign currency bonds work; it is a domain of experts and banks. Securities transactions are banks’ responsibility. I think the government should go the other way and change the standard calculation of net foreign currency position for banks. Today, banks may buy foreign currency (including foreign currency denominated government bonds) on the market to an amount not exceeding 5 percent of their capital. Should this limit be raised to 10 or even 20 percent, banks’ buying of foreign currency denominated domestic government bonds will double or triple. And note, it will happen without any large-scale public outreach campaigns or displaying posters about these bonds everywhere.”