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03/26/2014

Thematic Citizen Loan: an interim assessment (2/2)

A lot has been written about the Belgian government's « thematic citizen loan ». Many columnists speculated on its failure and expressed their doubts about the attractiveness of the promoted tax advantage which was considered as low (15% withholding instead of 25%). The financial sector too was not so eager to commercialize the product. However, since its start on January 1st, 788 million euros have been collected through the government's initiative. Febelfin published the program's first results last Friday March 7th and noted that "despite the low monetary rates, the Thematic Citizen Loan did find its public".

How to interpret the better than expected success of the Thematic Citizen Loan

Based on the analysis above, the Thematic Citizen Loan does not seem extraordinarily attractive. However, the published numbers are far better than expected and the initial duration of the program has been extended. Comments on the relative success have not given a real explanation yet and Febelfin reacted by noting that that "despite the low monetary rates, the Thematic Citizen Loan did find its public".

So why this success? While investors might make their investing choice into a Thematic Citizen Loan out of ethical reasons, it seems more likely it is the existence of those very low rates which convince them to invest into the product. While rates have never been lower, Belgian savings reached a historical high of 251 billion euros in January 2014, beating the 250 billion peak for the first time. This tells us (and banks) that investors are not so sensitive to low interest rates after all. It thus gives an extra incentive to banks to lower interest rates further. Apparently, investors have not yet regained confidence in the financial markets and choose to keep their money in safe places instead of investing it into more risky products. The Thematic Citizen Loan thus appeared at a perfect timing, by hitting the spotlights at the right moment to attract savers looking to invest their liquidity surplus into safe products.

As a reaction to the success, banks reduced their rates on the product, knowing the investor's relative insensitivity to low rates, and maybe also taking into account a lower appetite for the financing of Thematic Citizen Loans eligible projects.

There is however another reason that might explain the large amount of collected funds. According to a study of L'Echo, a seasonality effect of maturing products may have caused a big transfer of funds from existing medium-term savings products like certificate of deposits or term deposits to the Thematic Citizen Loan. In this regard, the Thematic Citizen Loan is more attractive since it offers a fiscal advantage for comparable interest rate and investment perios. Consequently, only 200 million euros would have generated a real contribution to medium-term savings, the rest being a transfer from one product to another similar one.

What should we expect for the future of the Thematic Citizen Loan?

At the end of last month, rates on the Thematic Citizen Loan were lowered by several banks. As pointed out earlier, this might only be the result of an expected insensitivity to lower interest rates of the investor. It could however also be a sign that banks do not want to collect too much funding on this product, reasons being funding with the same maturity could be allocated to more profitable projects. The extension of the program shows the intention of the government to maintain the support to the "real economy". With the elections approaching, the government will be glad to maintain a "socially responsible" program in the banking sector which seems to work quite well and even to exceed expectations. The banking sector's interests might however not be fully aligned with the government's agenda. Rates will rather be set such as to keep the gap in net yield with other products small. Consequently, we will not expect the Thematic Citizen Loan to collect much more than it already did until today.

Conclusion

The first two months of the Thematic Citizen Loan program has exceeded expectations by generating 788 million euros of deposits. The banking sector, not overly enthusiastic at first, has expressed its satisfaction with the results. While the program had been scheduled to last for one month only, banks are still offering the product today, which shows the government's intention of keeping up support to SMEs and social projects. Months before the elections, we can expect the program will continue to be promoted and be used as an election argument. Banks however have the power to keep the rates at a relatively uninteresting level using the argument of low ECB rates and might prefer not to boost the product. If compared with a term deposit for example, the low flexibility offered by the Thematic Citizen Loan should discourage the investor. A plausible reason to do so would be that projects not eligible to the use of funds collected with the Thematic Citizen Loan program generate more margin than eligible ones. If this is the case, then SMEs, schools and hospitals might find themselves in need of alternative funding again.


 

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