Czech Austerity Program May Cut Bond Sales to Pre-Crisis Levels by 2013

Czech sovereign debt issuance will likely peak this year and shrink to levels last seen before the global credit crisis by 2013, boosting the country’s bonds, as the new Czech government seeks to slash its fiscal deficit.

The European Union member’s gross borrowing may drop to 250 billion koruna ($12.8 billion) next year and to as little as 230 billion koruna in 2012 from 280 billion koruna this year, according to estimates by Raiffeisenbank AS. That compares with the previous administration’s outlook for funding needs to rise to 305.7 billion koruna and 312.9 billion koruna, respectively.

Prime Minister Petr Necas’s cabinet, which took office in July, has pledged to cut the deficit to within the EU’s 3 percent limit by 2013 from 5.9 percent last year. The country will need to borrow 250 billion koruna to 270 billion koruna in 2011, Deputy Finance Minister Jan Gregor said today. A revised debt management plan will be published in December, he said.

“The new government is planning a palpable budget consolidation,” Michal Brozka, a fixed-income analyst at Raiffeisenbank in Prague, said in an interview yesterday. “The market now expects a rating improvement in the medium term.”

Standard & Poor’s said on Aug. 10 it may raise Czech debt ratings if the government follows through on its promises, including an overhaul of the pension system. The economy will grow 1.6 percent this year, the ministry said on July 15. A year earlier the ministry had forecast 0.3 percent growth in 2010.

Record Borrowing

Czech borrowing needs reached record levels this year as the country recovered from its deepest recession in two decades, hurting tax revenue and raising spending. Necas’s cabinet has proposed cuts in next year’s budget, including road construction, social benefits and public-administration costs.

“Once fiscal reforms are put in place, borrowing will come down quickly,” said Anne-Francoise Bluher, a bond analyst at Komercni Banka AS, the Prague-based unit of Societe Generale SA. “Our projections suggest that the largest issuance of bonds will occur this year and then the offer will dry up. This should reduce supply pressures on the market substantially.”

Komercni expects the amount needed to cover the deficit and repay maturing debt will drop to 254 billion koruna next year, Bluher said. In 2013, the ministry may raise 209.3 billion koruna, or 4.8 percent of gross domestic product, less than the 5.3 percent in 2006 and 4.9 percent in 2008, she said.

Narrowing Spread

A Czech sale of 2 billion euros ($2.56 billion) of bonds on Sept. 6 drew 5.3 billion euros in bids as the austerity plan and optimism about emerging-market debt sent the country’s borrowing costs below those of higher-rated Italy. Czech bonds have rallied this quarter, pushing the yield on the benchmark koruna note maturing in April 2019 to a record low of 3.123 percent today as of 2:15 p.m. in Prague.

The extra yield investors demand to hold the 2019 bond over similar-maturity German bunds fell to 88 basis points today from 111 basis points a week ago. The so-called spread peaked at 173 basis points three months ago after dropping to record-low 54.5 basis points on April 14.

“If they really can reduce the borrowing requirements, the spread over German bunds will have room to narrow,” Brozka said. “In the horizon of one year it shouldn’t be difficult to bring the risk premium to a half of the current levels.”

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

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