Czechs Tout Austerity to Push Eurobond Premium Below East Europe Neighbors

By Peter Laca – Jan 12, 2012 11:00 PM GMT+0000

The Czech Republic should sell Eurobonds this year at better terms than other eastern European Union states because of government plans to trim the budget deficit, Deputy Finance Minister Jan Gregor said.

The Finance Ministry will be ready to sell between 1 billion euros ($1.3 billion) and 2 billion euros of debt from the start of February after the ministry updates its macroeconomic forecasts, Gregor said yesterday in an interview in Prague. The ministry may sell a bond on foreign markets denominated in other currencies if terms for a Eurobond issue aren’t favorable, he said.

“The Czech Republic in the past two years detached itself from the region and it’s perceived as being closer to the quality countries in the euro area,” Gregor said. “I hope that the fundamentals behind this won’t change.”

Prime Minister Petr Necas’s pledge to reduce the shortfall to less than the EU limit of 3 percent of economic output by 2013 has helped shield Czech bonds from the euro area’s sovereign-debt crisis, which has prompted investors to sell the region’s assets. Czech funding costs are the lowest in emerging Europe and the koruna outperformed its peers in Poland and Hungary last year, according to data compiled by Bloomberg.

The premium investors demand for holding the Czech 10-year government bond over a similar German security was 185 basis points, or 1.85 percent, yesterday, compared with 393 points for Poland, the region’s largest economy, and 752 points for Hungary, data compiled by Bloomberg show. The spread for Slovakia, a euro-area member, was 281 basis points.
‘Great Effort’

The cost of insuring against a Czech default is the second lowest in emerging Europe after euro-region member Estonia at 184 basis points, compared with 285 points for Poland, CMA’s data on credit-default swaps show.

“There is a great effort to meet the fiscal targets, even in worsening economic conditions, so that the Czech Republic’s credibility doesn’t decrease,” Gregor said. “The intention to amend the budget so that the cash deficit is around the targeted 105 billion koruna ($5.3 billion), strengthens the Czech fundamentals.”

Finance Minister Miroslav Kalousek said the government will stick to the fiscal targets and amend the budget plans for this year if economic growth is less than assumed in the budget.
Financing Cushion

The Czech Republic refrained from selling foreign bonds in 2011 as the escalating debt crisis in the euro area drove up the cost of default insurance across the continent and threatened to slow economic growth. A bigger-than-planned sale of koruna- denominated bonds in the fourth quarter provided a financing cushion for the government.

The Finance Ministry’s debt-management strategy for this year includes the possibility of selling bonds in currencies other than the euro, said Gregor.

“The euro remains the primary currency for foreign borrowing, but we will be analyzing other alternatives as well,” he said. “We didn’t want to open the market this year, and this has been done now by our colleagues in neighboring countries.”

Poland sold 750 million euros more of its euro-denominated bond due March 2017 this week at a yield 237 basis points above the benchmark mid-swap rate, an increase from a 100 basis-point premium at the first sale in March 2010.

Slovakia sold 1 billion euros of bonds this week, with the five-year 4.625 percent security priced to yield 305 basis points more than the benchmark mid-swap rate.
Rating Upgrade

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 a par with Japan. The upgrade reflected a change in rating criteria that highlighted the Czech government’s low indebtedness and the “prudently managed and balanced economy,” S&P said.

The Czech Republic last sold euro-denominated bonds in September 2010, raising 2 billion euros due in April 2021 and priced to yield 105 basis points more than the benchmark mid- swap rate.

The government hired Barclays Bank Plc, Erste Group Bank AG’s Czech unit Ceska Sporitelna AS, Societe Generale SA and UniCredit SpA (UCG) in July to manage the planned Eurobond sale.

“We will closely monitor developments on the markets, and as soon as we see a window of opportunity, we want to enter the markets,” Gregor said. “Once the documentation is ready and includes the updated forecasts, it may be a question of days.”

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