The controversy surrounding Savings Certificates

The State abruptly ended the issuance of the Series E Savings Certificates. This decision generated some controversy that is worth demystifying.To perceive how Certificates work and what the State uses them for is crucial to understand the decision.

What is the purpose of Savings Certificates?

Contrary to what most people think, Savings Certificates were not created to boost savings. Certificates are just another way for the State to finance itself. As we all know, the Portuguese State needs revenue to be able to meet its expenses and to be able to provide quality services to its taxpayers. The most common source of revenue is the taxes we all pay. at the same time and because the revenues are lower than the expenses that the State has, there is a need to resort to financing. In this way, the Portuguese State can do so in the financial markets, through the issuance of bond loans or through the issuance of Savings Certificates.Read more: Savings certificates: What changes with the new F series?

What’s the risk?

If Certificates are a way for the State to finance itself, the risk of these financial products is the risk of the Portuguese State. What does this mean? If Portugal goes into default, that is, it is unable to pay its commitments, the certificates may not be paid to its subscribers. This point is very important, because a large percentage of the population is unaware that certificates have an associated risk. Even if it’s reduced. To materialize this risk, the Portuguese State needs to go bankrupt, something that never happened in Portugal.

Who issues savings certificates?

The IGCP (Treasury and Public Debt Management Agency) is the entity responsible for managing the State’s debt. So the IGCP’s mission is to issue new bond loans or certificates, in order to guarantee that the State has the necessary liquidity for its expenses and, at the same time, be responsible for an effective and balanced management of the total amount of debt issued. In this way, one of the fundamental points is the management not only of the amount of debt that the State assumes, but above all, of the costs with the contracted debt service. In other words, IGCP has to manage the financing costs of the loans it requests. Now, if we analyze the financial markets, we notice the IGCP’s decision to end the Series E. Currently, the Portuguese state manages to finance itself at a lower cost than the 3.5% it was paying on certificates of savings. We might even ask another question: Why didn’t IGCP end this series a long time ago? In its place, the IGCP issued a new Série F, which will have a maximum return of 2.5% per annum (plus retention premiums). Even so, this will be one of the best alternatives that savers have. Another interesting point is that this new series only allows the subscription of 50,000 euros per subscriber, while the previous one allowed 250,000 euros. Why does this happen? My interpretation is that the IGCP also intends to manage the exposure of different investors to State risk. With the huge adhesion to the E Series, the Savings Certificates currently represent a high percentage of Portuguese debtand this is a risk that must be managed rationally. Also read: Take advantage of Savings Certificates while they are worth it

Who wins with the end of Serie E

Those benefiting from the end of Series E and the beginning of Series F of Savings Certificates are all Portuguese taxpayers. Why? Because the State will pay less to finance itself and in this way the resources that were spending too much will be available for other investments/expenses that the State may need. In a simple way, our taxes are being better managed with this step that the IGCP has taken. Obviously the savers will be left with an investment option with lower profitabilitybut even so, if we analyze the risk/return, it continues to be one of the most interesting within this segment.

Did the banks have influence?

Banks’ mission is to manage their operations well and generate profit. There is no influence of financial institutions in this position taken by IGCP, nor any requirement for banks to have attractive time deposit rates. Simply put, banks “offer” higher rates of return when they need to reinforce liquidity for their operations. Not having that need, they don’t. The reality is that with covid, banks managed to capitalize at very low costs, and at the moment their strengthened balance sheets and no need to pay attractive rates to raise liquidity, despite the fact that the European Central Bank raised reference rates. It is true that many savers transferred large amounts from banks to Savings Certificates, but even so, financial institutions remain well capitalized, not having, for the time being, the need to increase the return on deposits in order to capture liquidity.Also read: How to subscribe to savings certificates? Passionate about sport and economics, he was a professional football player, having played for clubs such as SL Benfica, Estoril, among others. He reconciled his sports career with his academic career, finishing his degree in Economics at the Faculty of Economics of Universidade Nova de Lisboa (NOVA SBE). He remains connected to his two professional passions, performing the role of Financial Advisor and collaborating as a sports analyst at CNN Portugal. He was a resident commentator on JE’s Jogo Económico program and Chairman of the Supervisory Board of the Portuguese Footgolf Federation. (FPFG). He regularly participates in Financial Literacy events. The information contained in the article is not binding and does not invalidate the full reading of documents that support the matter in question.