Bloomberg News

Czechs May Sell Eurobond at Yield Below Higher-Rated Belgium

September 02, 2011

(Updates yields, CDS in fifth paragraph.)

Sept. 2 (Bloomberg) -- The Czech Republic’s funding costs may fall below higher-rated Belgium’s at an international bond sale as soon as this month as investors bet on a deficit- reduction plan.

The government plans to sell at least 1 billion euros ($1.4 billion) of foreign debt by the end of October, tapping markets for the first time since a 2 billion-euro offering a year ago.

The yield on the Czech Republic’s euro-denominated notes due in April 2021 fell to the lowest in more than 10 months on speculation lower debt will help the country avoid the euro- area’s credit crisis. Prime Minister Petr Necas plans to cut the budget deficit to less than the European Union’s limit of 3 percent of economic output by 2013.

“The Czech Republic is seen by many as a safe haven, with credible fiscal and monetary policies,” Simon Quijano-Evans, chief economist for Europe, Middle East and Africa at ING Groep NV’s, said on Aug. 30. “Investors will be hungry for yield pick-up coupled with quality, which is where a Czech Eurobond would fit in well.”

The 2021 notes in euros yielded 3.79 percent yesterday, compared with 4.05 percent for Belgium’s securities of similar maturity. The cost of insuring against a Czech default is the lowest in emerging Europe at 110 basis points, half of 254 points for Belgium, CMA’s data on credit-default swaps show.

Standard & Poor’s on Aug. 24 raised the Czech Republic’s long-term foreign-currency debt two steps to AA-, the fourth- highest grade and on par with Japan and below Belgium at AA+. S&P said the upgrade reflected a change in rating criteria that highlighted the Czech government’s low indebtedness and the “prudently managed and balanced economy.”

Low Debt

The Czech Republic’s government debt at 39 percent of gross domestic product at the end of last year was the lowest among the EU’s four biggest eastern economies and less than half of the euro-area’s average, according to European Commission data. Belgium, which has a similar population, economic growth and budget deficit as the Czechs, had debt at 97 percent of GDP.

“Investors have started to discern the quality of sovereign borrowers and the Czech Republic is doing very well in this area,” Deputy Finance Minister Jan Gregor said in an interview on Aug. 24. “I hope that September or October will be the ideal months and the window of opportunity will open.”

Economic Recovery

The Czech economy’s recovery is driven by demand for its products, including Skoda Auto AS vehicles and car parts, in western Europe. Consumption has been damped after the government raised taxes and trimmed spending to cut the budget deficit and as the unemployment rate has stayed above 8 percent for more than two years.

Bills changing the pension system and taxes, part of the government’s plan to control the budget, are scheduled for the final reading in the lower house of parliament during a session that started on Aug. 30.

The government may need to cut spending next year to meet its budget-deficit target because the euro region’s debt crisis will probably lead to slower economic growth, Finance Minister Miroslav Kalousek said Aug 21.

The Finance Ministry may cut its 2012 GDP growth forecast from 2.5 percent on concern that exports, which account for about 70 percent of the economy, will wane, according to Kalousek. The Cabinet targets to narrow public-finance gap, the fiscal yardstick for assessing an EU member’s readiness to adopt the euro, to 4.2 percent of GDP this year from 4.7 percent in 2010. The 2012 target is 3.5 percent.

Koruna Climbs

The budget plans also helped the Czech koruna gain 2.7 percent against the euro this year, the most among more than 20 emerging-market currencies tracked by Bloomberg. Belgium, a charter member of the euro region, had a budget gap of 4.1 percent of GDP last year.

“The Czech Republic is the silver lining on the horizon,” Commerzbank AG analyst Carolin Hecht said in an e-mail. “Even if the rating change is mainly due to a change in the evaluation measures, it underlines once again the role of the Czech Republic as an island in the eastern European universe.”

--Editors: Alan Crosby, Balazs Penz

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net; Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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