Bond aims to boost competition among banks
Belgium has launched a new bond for retail investors that offers a higher interest rate than most bank deposits. The bond, which has a one-year maturity, pays a rate of 3.3%, compared to the 2.8% rate on outstanding deposits of up to two years, according to Belgium’s central bank.
The bond is aimed at pressuring banks to raise their deposit rates, which have been low due to the excess liquidity in the banking system. “The gap between the interest that banks collect and that they pay to savers… remains too large,” said a statement on the finance minister’s website announcing the terms of the bond. “We want to boost competition and encourage banks to raise interest rates.”
Strong demand from savers
The bond, which is open for subscription until Aug. 31, has attracted strong demand from savers. On Thursday, the first day of the sale, savers bought at least 828 million euros of the debt, Jean Deboutte, director at Belgium’s debt agency, told Reuters. That excludes orders savers put for the bond through their banks, meaning demand is already likely above 1 billion euros, Deboutte said, well above the 390 million euros Belgium had raised from savers so far this year.
Demand while strong is a tiny fraction of the hundreds of billions of euros of Belgian deposits. Still, Deboutte said some banks in Belgium had already raised their rates following plans for the new bond. “I think it will be an incentive to the banks to do more,” he said, though he added that banks awash with liquidity might not mind outflows.
Tax benefit for bond buyers
To make the bond more attractive, the government has agreed a bill pending approval reducing the withholding tax buyers will pay to 15% from 30% on the rest of its retail bonds. The withholding tax is deducted from the interest income earned by bondholders.
The tax benefit will give savers an edge over bank deposits, which are subject to a flat tax rate of 30%. For example, a saver who invests 10,000 euros in the bond will receive 280.5 euros in net interest income after tax, while a saver who deposits the same amount in a bank account with a 2.8% rate will receive only 196 euros.
Government debt as an alternative for savers
Government debt has become a popular alternative for savers who are looking for better returns than bank deposits. States across the euro zone are taking advantage of savers’ appetite with some shifting big slices of their funding programmes to households.
Belgium, which has a high public debt ratio of around 120% of GDP, has been issuing bonds dedicated to retail investors since 2011. The bonds have maturities ranging from three to ten years and pay fixed or variable interest rates. The new one-year bond is the first of its kind and is designed to compete with bank deposits.
