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Czech Eurobond Funding Costs Beat Italy on Austerity
The Czech Republic sold its first euro-denominated bonds in more than a year as planned austerity measures and optimism about emerging-market debt sends the country’s borrowing costs below those in higher-rated Italy.
The European Union member raised 2 billion euros ($2.58 billion) selling debt due in April 2021 priced to yield 105 basis points more than the benchmark mid-swap rate, the Finance Ministry in Prague said today in an e-mailed statement. That compares with a spread of 116 basis points for Italian debt with a similar maturity, according to data compiled by Bloomberg.
“I’d categorize the Eurobond sale as exceptionally successful,” Finance Minister Miroslav Kalousek was quoted as saying in the ministry’s statement. “Investors recognize the strength of the government reforms, which have significantly lowered the risk premium due to its positive influence on the expenditures of the state budget.”
Czech bonds have rallied this quarter with yields falling to record lows in August after the government pledged to halve its fiscal deficit in three years and investor demand for emerging-market bonds revived on an outlook for faster economic growth and lower public debt levels than in developed nations.
Total demand in the sale was about 5.3 billion euros and that the securities will cover the government’s borrowing needs for the rest of the year and “the first months” of 2011, the ministry statement said, confirming details given to Bloomberg earlier in the day by a banker involved in the transaction. The banker had declined to be named.
‘Good Opportunity’
“This sale is a good opportunity to get exposure to a high-grade emerging Europe sovereign with fairly solid fundamentals,” said Stefan Kolek, a Munich-based strategist at UniCredit SpA, before the bond was priced. “There will be demand from the likes of high grade funds and pension funds.”
The Czech Finance Ministry delayed an issue of foreign bonds in April as concern Greece might default drove up borrowing costs across Europe. It last sold euro debt in April 2009, when it raised 1.5 billion euros of 2014 notes at a spread of 190 basis points. The security now yields 2.42 percent, or 71 basis points more than the benchmark swap rate.
“The historically lowest yield of 3.707 percent in the given maturity confirms high international credibility of the country and recognizes strong macroeconomic fundamentals and the government program,” Deputy Finance Minister Jan Gregor said in the statement.
Barclays Capital, Ceska Sporitelna AS and Deutsche Bank AG arranged today’s offering, the government said on Sept. 3.
Better Conditions
“Financing conditions are now better than in the spring as concern about heavily indebted euro-zone countries is abating, which has also reduced the risk premium for central Europe’s countries,” Vojtech Benda, a Prague-based economist at ING Bank NV, said by phone on Sept. 3. “It was worth the wait.”
Czech borrowing needs jumped to a record 280 billion koruna ($14.6 billion) this year as the country is recovering from its deepest recession in two decades, hurting tax revenue and raising social spending. The ministry said last week it will cut domestic bond sales in the last quarter to the smallest amount this year after Kalousek announced in August the administration will tap international markets.
“The sale of 2 billion-euros worth of Eurobonds will reduce the financing requirements in the domestic market,” said Michal Brozka, a Prague-based analyst at Raiffeisenbank AS, in an e-mailed report to clients today.
‘Little Supply’
The Czech Republic’s euro-denominated debt was 6.3 billion euros before today’s sale, according to data compiled by Bloomberg News. That compares with 24 billion euros of euro- denominated bonds in Poland. Total foreign-currency debt was 7 billion euros, including issues in the yen and the Swiss franc, against an equivalent of 40.4 billion euros worth of Czech government debt denominated in the koruna, the data show.
“There is little supply in euros either from the sovereign or corporates, so there is potentially some scarcity value there,” said Kolek. “However, dedicated emerging-market funds will hardly consider the issue, as the spread is too tight.”
JPMorgan Chase & Co.’s EMBI+ index shows the extra yield investors demand to hold emerging-market debt rather than U.S. Treasuries has fallen to 276 basis points today from a 354.7 basis-point spread on May 25, when the euro sank to its weakest since 2001 versus the yen as concern about Europe’s debt peaked.
Public debt will reach 85 percent of economic output in the 16-nation euro area and could be 118 percent in Italy, compared with 54 percent in Poland and 40 percent in the Czech Republic, European Commission estimates show. Czech sovereign debt is rated A1 at Moody’s Investors Service, its fifth-highest investment grade and two steps below Italy’s Aa2.
Ratings Boost
Prime Minister Petr Necas’s Cabinet, which took office in July, has pledged to cut the fiscal gap to within the EU’s limit of 3 percent of economic output by 2013 from 5.9 percent last year. Standard & Poor’s said on Aug. 10 it may raise the Czech credit rating if the government follows through on its promises, including an overhaul of the pension system.
Government borrowing costs declined to a record low at a sale of five-year koruna bonds last week as investors bid for 2.5 times the amount offered. Auctions of 15-year and three-year notes in August were also more than twice oversubscribed and the average accepted yields fell to the lowest for the securities.
‘Clear Commitment’
Demand for Czech sovereign debt has improved since the government “at least verbally showed a clear commitment to reduce the deficit” and S&P upgraded the country’s credit outlook to positive, Benda said. “It is now clear that Czech sovereign debt is safer than that of some euro-zone countries, such as Greece, Spain or Portugal.”
The yield on the benchmark 2019 koruna note fell 19 basis points today to 3.171 percent at 5:40 p.m. in Prague, near its record low of 3.164 percent on Aug. 27. The cost of protecting government debt against default with credit-default swaps fell to 93 basis points on Sept. 3. This compared with default-swap levels of 135 for Poland, 188 for Italy, 209 in Spain, 350 for Hungary and 858 in Greece, CMA DataVision data show.
The koruna, the second-best performer among more than 20 emerging-market currencies tracked by Bloomberg in the past three months, weakened 0.2 percent to 24.725 per euro today.
To contact the reporters on this story: Sonja Cheung in London at scheung58@bloomberg.net; 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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