Financial trends and economic growth in the EU

• 06.08.2024.
• News, Finances

Reference interest rates in the EU are undergoing significant changes, opening doors to new opportunities for economic growth. Learn how Euribor influences financial trends and what financing options are available. Ivica Žuro provides insight into key economic factors and their application in his new article.

What are the prospects for increased economic activity in this part of the EU and in the entire continental economy?  
 
The prospects are very good because of the steadily occurring reduction in reference interest rates since the beginning of the year. This trend is accompanied by the first reduction in official interest rates by the ECB, the European Central Bank, by 0.25 percentage points.  
 
Despite continuous fluctuations, both up and down, the value of reference interest rates in domestic banks changes twice a year, usually at the beginning of the first and third quarters.  
 
Can we learn more about which reference rate is used and its nature?  
  

Euribor - From LIBOR to domestic interest rates  

There is only one in use in several variants: Euribor, the average interest rate at which a group of European banks lend money to each other and the market. This rate is quoted daily and serves as a fundamental reference value for a wide range of financial products and transactions in the European Union.  It is an abbreviation for the term Euro Interbank Offered Rate.
 
It came into widespread use as a replacement for the controversial LIBOR, which had been used for 53 years since its inception due to a specific situation.  
 
This situation in 1969, to find a way to set the financing price for a syndicated loan of 80 million dollars to the then Iranian Shah Reza Pahlavi. This last monarch of the Persian Empire was evidently a credible borrower since he was in a position to take out the mentioned loan, which would amount to 685 million USD in today's terms.  
The history of Euribor dates back to the early 1990s when the need for a unified reference interest rate within the eurozone emerged. Before that, each EU member country had its reference rate, making cross-border financial transactions somewhat complicated.  
The solution imposed itself, introducing a standardized rate that found application as a reference rate for a wide range of financial products and loans.  
 
It also serves de facto as a barometer of the macroeconomic climate and trends, for example, indicating by its rise the need to fight inflationary pressures or by its fall the slowing down of economic activities.  
 
Commercial banks use it to determine their interest rates on various loans, including mortgages, personal loans, and business loans. This interest rate is applicable to different maturities, from one week to one year. More about each follows below.  

• The 1-week Euribor is most often used for short-term transactions.  
• The 3-month Euribor is the eurozone's most commonly used reference interest rate for short-term lending. It represents the average interest rate at which European banks offer unsecured loans to each other with a maturity of three months. It is mainly used for consumer loans and adjustable-rate mortgages, which are loans to individuals.  
• As for loans to legal entities, most banks use the 6-month Euribor as a reference part of the interest rate.  
• The 12-month Euribor has the most extended maturity and represents the average rate at which European banks lend to each other for one year. It is primarily used as a reference rate for long-term loans and specific financial instruments.  

 

Factors influencing Euribor - monetary policy and economic conditions  

The factors that can influence the movement of these rates are diverse, and the following stand out among them.  

Monetary Policy  

Every change in interest rates made by the European Central Bank (ECB) plays a vital role in influencing Euribor rates through its monetary policy decisions.  

Market Sentiment  

Rates are also influenced by market sentiment, the dynamics of supply and demand, and the perceived creditworthiness of banks participating in the interbank lending market.  

Economic Conditions  

Inflation, unemployment, and GDP growth can influence Euribor rates. A strong economy usually exerts upward pressure on rates, while economic uncertainties can lead to decreased interest rates.  
 
A recent example comes from the pandemic period when the Euribor plunged well below zero following GDP declines of 10% or more. It was necessary to keep financing costs as low as possible to make the burden of obligations for companies manageable under significantly challenging business conditions.  
 
On the other hand, challenging times did not cease even after Covid, due to the war in Ukraine and the crisis in the Red Sea. High energy prices and generally still noticeable inflation rates have kept Euribor at its highest in the last 15 years, with the highest value since the peak of the financial pandemic 2008.  

 

Specific financing conditions - maximum loans and financing options  

Without further ado on financial matters, let's get to the specifics of financing conditions by domestic banks.  
 
Discussions usually revolve around interest rates and down payments, less frequently about fees and other core elements that make up the total cost of capital, and rarely about limits.  
  
What maximum loan amounts can be obtained from domestic banks if they are not part of programs in cooperation with the Croatian Bank for Reconstruction and Development (HBOR) or syndicated (club) financing involving multiple banks?  
Croatian banks are most often willing to independently finance amounts up to 4 million euros, some even a few million more.  
  
For more significant investments - we are talking about 8 figures before the decimal point - there are two ways to realize them:

1. Or investment funds (which can stretch to 20 million euros without a problem) and offer the possibility of financing with insufficient participation. 
   In Lijepa Naša, several premium complexes were financed in this way, as well as investments in the takeover of certain businesses. 
2. Or syndicated financing, which are a special type of loan that includes two or more banks as creditors, each of which has a share in the loan. One of them acts as an agent responsible for coordinating relations between borrowers and all participating banks, which, among other things, includes the collection, payment and repayment of funds to creditors. The construction of most new domestic hotels is mainly financed through this model.  

So, there are options through classical finance; there is no need to pitch to someone from Silicon Valley.  
  
And you have someone to turn to if you need money from an external source.  

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