Analytics, Economics, Estonia, Financial Services, Investments

Hansson commented on Tuesday in the Riigikogu when introducing the central bank's 2014 annual report the common beliefs, concerning central banks' bond purchases and the accompanying decrease in the interest rates, that it is a free lunch that Estonia has been deprived of because the Estonian state does not issue state bonds.

"We all know that there is no such thing as a free lunch. Even if the central bank bought a quarter of the government bonds, it still is a debt that must be repaid," said Hansson.

Hansson estimated that financing investments with government bonds can be ineffective and counterproductive, even if the projects are good.

He explained that considering the current low unemployment level and rapid wage increases, a large proportion of the additional funds gained via issuing government bonds would be "lost" because a lot more than before has to be paid for the implementation of infrastructure projects.

"In addition, big state construction projects of temporary nature would cause major economic and social problems in Estonia, because after the completion of the large projects, a significant part of the employees bought over from other sectors would have no use," he said.

Hansson said it should be understood that Estonia benefits from the bond purchases of euro area central banks. Financial markets operate on the principle of connected vessels – if in some region interest rates are more favourable, the impact spills over to the rest. Lower interest rates in the euro area mean that Estonian companies and households can get more favourable loans, and so does the Estonian state, if need be.

"If with the support of more favourable financing conditions, the European economy gathers momentum, Estonian exporting companies also benefit from it. And this is the aim to which the bond purchase program is directed," said Hansson.