"Blind" faith as interests climb

On May 10, 2004, the Finance Ministry will be paying an interest equal to no less than five percentage points above the inflationary rate calculated September 2003 through March 2004 based on the data released by the National Statistics Institute.

This is what the ministry pledged last week, before those that bought the first bonds bearing an interest indexed relative to inflation and due in five years. The new instruments will have the Finance Ministry pay the interest twice a year on May 10 and November 10, 2004, 2005, 2006, 2007 and 2008. The Finance Ministry agreed to pay up to 15.85% a year for its latest bonds due in six months and released in September.

The ministry is paying no more than 17.8% for one year. The launch of the five-year bonds is the Finance Ministry’s way of saying it trusts the inflation downward trend to continue as planned (9% by late 2004) in spite of pessimism on the market. All in all, the investors know the 14% target set for 2003 stands more and more chances of being missed, with inflation tending towards 15%. The generosity of the Finance Ministry, however, has made many invest money in the bonds that guarantee them a safe yield, shielded from possible inflationary trends outside the scheduled development.

It remains to be seen whether the gain will be carried over to the next auction. The market was expecting the Finance Ministry to offer no more than four percentage points above inflation, so that the five percent allowed the Treasury to raise 159bn ROL out of the 200bn ROL it was planning to.

The banks invested 110bn ROL of this amount, while individuals invested the rest.

After having left the market benchmark-less in terms of two and three-year financing interests, the Finance Ministry is now trying to make a benchmark out of an inflationary rate that keeps raising suspicions as to how accurate it is in capturing the price trend.

The lack of confidence in an inflationary decline as sharp as the official forecasts make it to be is causing the market to ask high interests for two and three-year bonds. razvan.voican@zf.ro