Laks Den Haag costs us hundreds of euros extra

Additional interest costs for the Dutch State of between €5,8 and €9,2 billion per year. That was the unpleasant message from Finance Minister Sigrid Kaag to the House of Representatives. Converted, this is an extra bill for each of us of between €340 and €540 per year, for the time being every year. These extra interest charges are caused by the rise in long-term interest rates. In the summer of last year, the State received money when it borrowed money, but now the State pays about 2,25% to borrow money for a period of 10 years. 

The bitterness of that extra bill of a few hundred euros per year (again per person, so for a family of 4 it quickly amounts to more than €1.000 (if all goes well) to even €2.000 (if all goes wrong)), is that it could have been largely prevented. In recent years, the Netherlands has not only had to deal with very low interest rates, but even negative interest rates. The State could have used that period to extend the average term of the national debt, as economists call it. The longer that average term (you collect all debts and calculate their weighted average), the less trouble you will have if interest rates rise.  

More long-dated government bonds
Suppose that the entire Dutch debt had an average term of 1 year, which means that it had to be refinanced every year. If interest rates rise, refinancing will become more expensive. With an average term of, let's just say, 10 years, you have determined the low interest rate for that period. Just as many do with their mortgage interest. In the summer of 2019, the average duration of the Dutch government debt was roughly 8 years. It is now just over 9 years old. Slightly higher, but not really much higher. The weighted average has even changed much less.  

How could the State have done that? Simple, by issuing more long-term government bonds. The State is currently going up to a maximum of 30 years, but many countries have also issued 50-year debt securities to partly fix the low interest rates of recent years. France and Italy, to name a few euro countries, have done so in recent years. Italy took out a 50-year loan at 2,2% interest. Since the Dutch creditworthiness is much higher, the Netherlands could have taken out the same loan at a much lower interest rate.  

Maturities of 100 years
Austria went even further and sold government bonds with a maturity of 100 years. In 2019, the government in Vienna borrowed money at 0,88% interest. 0,88%. Per year. Every year. Until 2119. Austria also has a lower credit rating than the Netherlands! The German state of North Rhine-Westphalia did the same, several times, including at the beginning of this year. That state has even stretched the average term of debts to more than 19 years. If the Netherlands had done the same, we would not have had to deal with an extra bill of between €340 and €540 per person in these already expensive times. To govern is to look ahead and in an environment of negative interest rates, you as a State could have concluded that this is not eternal and could have benefited from it while it lasted.  

Do I call this afterwards, nice and easy? No. Years ago, when interest rates were low for the State, I also suggested that.  

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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