Bloomberg News

Czechs May Delay Eurobond Sale After Boosting Local Funding

November 01, 2011

(Updates with auction in 11th paragraph, yield in 12th.)

Oct. 26 (Bloomberg) -- The Czech Republic may delay plans to sell Eurobonds this year because international markets are volatile, while budget cuts and low inflation help borrowing in the local currency.

The government this month sold about 20.4 billion koruna ($1.1 billion) of retail bonds, double the target, and will keep the money for 2012, Petr Pavelek, head of the Finance Ministry’s debt-management department, said yesterday. Earlier plans for 50 billion koruna in domestic bond auctions this quarter remain unchanged and will cover remaining funding needs.

“Our fourth-quarter issuance plan was designed to make sure that borrowing needs are covered even without Eurobonds,” Pavelek said in an interview in Prague. “We want absolute certainty that there will be demand, and the market volatility is high now. The way we look at Eurobonds is not that we need the funds but we want to maintain the financing channel.”

The government in July hired four banks as managers for an offering of as much as 2 billion euros ($2.8 billion) of debt. The sale has been on hold after a worsening of the euro region’s sovereign-debt crisis drove up the cost of default insurance across the continent and threatened to slow economic growth.

“The foreign issue is still in the game this year, but if we decide the negative factors are prevailing, we may delay it until the beginning of 2012,” said Pavelek. “Our position has become much more comfortable, also thanks to the retail bonds.”

Deficit Cuts

With this month’s sale, Premier Petr Necas’s administration tapped households for the first time in 14 years. It may sell as much as 40 billion koruna of retail bonds next year to help cover its 2012 gross borrowing need of 226 billion koruna, according to Pavelek.

Czech local-currency bond yields slumped to all-time lows last month after Standard & Poor’s on Aug. 24 lifted Czech debt two notches to AA-, the fourth-highest investment grade, citing changes to its rating criteria and the government’s low debt.

This year’s public-finance shortfall will be less than 4 percent of gross domestic product, down from the original target of 4.6 percent and a 5.8 percent deficit in 2009, Finance Minister Miroslav Kalousek said yesterday. A draft 2012 budget now in parliament narrows the gap to 3.5 percent.

Five-year bond yields were little changed today at 2.005 percent as of 3 p.m. in Prague, up from a record-low 1.896 percent on Sept. 12, according to government bond indexes compiled by Bloomberg. The yield stood above 2.8 percent in December, when the government published its borrowing strategy for this year.

‘Positive’

“The situation in the domestic market remains positive for the ministry in terms of demand and yields,” Anne-Francoise Bluher and Marek Drimal, analysts at Komercni Banka AS in Prague, wrote in an e-mail last week. “The probability of a Eurobond issuance this year has declined markedly.”

The ministry today sold 7.2 billion koruna more of local notes due in March 2014, with investors bidding for nearly three-times the amount, according to central-bank data published on Bloomberg. The average accepted yield fell to 1.599 percent from 1.63 percent at an auction a month ago and was the lowest since the security was first offered in February.

Czech Eurobonds gained today, pushing the yield on the note due in April 2021 down 9 basis points, or 0.09 percentage point, to 3.559 percent by 2:23 p.m. in Prague. A close at that level would be its lowest since the debt was sold in September 2010.

The cost of insuring Czech debt against default has fallen more than 27 basis points this month to 127 points today. That is the lowest level in central and eastern Europe and compares with 189 basis points for AAA-rated France, CMA data show. Czech default swaps, which rise as perceptions of creditworthiness worsen, stood at less than 90 basis points when the government picked Eurobond managers in July.

--With assistance from Peter Laca in Prague. Editors: Douglas Lytle, Linda Shen, Stephen Kirkland

To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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