The Czech Republic may sell euro-denominated bonds as early as May as the government’s pledge to narrow the budget deficit keeps borrowing costs below those of euro members Italy and Slovenia.
The country plans to sell 1 billion euros ($1.33 billion) or 2 billion euros of the bonds this year, with timing depending on market conditions, Deputy Finance Minister Jan Gregor said in a Jan. 14 interview. The European Union member sold 2 billion euros of foreign-currency bonds in September, with investors seeking 5.3 billion euros of the securities.
“I would welcome it if we managed something similar this year,” Gregor said. “Investors are registering the credibility of the Czech Republic.”
Prime Minister Petr Necas, in power since July, aims to cut the budget shortfall in half by 2013, bringing it in line with the EU limit of 3 percent of economic output. Efforts to reduce spending were aided last year as the economy returned to growth after the worst recession in two decades.
Gross borrowing will drop to 220 billion koruna ($12 billion) this year, from an estimated 252 billion koruna in 2010, according to a Finance Ministry debt strategy published in December.
Czech local-currency bonds have been Europe’s best-performing sovereign debt in the past six months, with the yield on the koruna securities due in 2020 falling 16 basis points since July while 10-year funding costs throughout the rest of the region rose, according to data compiled by Bloomberg.
The yield, which moves inversely to bond price, on the benchmark koruna note dropped 3 basis points to 3.94 percent today as of 4:25 p.m. in Prague, the lowest in three weeks.
“Investors now have a relatively good opinion on the Czech Republic’s credibility,” Michal Brozka, a fixed-income analyst at Raiffeisenbank AS in Prague wrote in response to e-mailed questions today. “There is a good chance the Czech credit rating will be increased. The conditions for a Eurobond issue should hence be relatively good.”
Insuring Czech sovereign debt against default is cheaper than for AAA-rated France and Austria, with credit-default swaps for the emerging-European country at 91 basis points yesterday, compared with 94 for Austria and 104 for France, according to prices from data provider CMA. Default swaps rise as investor perceptions of the borrower’s creditworthiness deteriorate.
The ministry may pick managers for the Eurobond by the end of March and will likely sell the debt in the two months before markets slow down in the middle of July or in the September-October period, Gregor said. Barclays Capital, Ceska Sporitelna AS and Deutsche Bank AG arranged the September offering.
“These are preliminary plans,” Gregor said. “Because we want to be as flexible as possible, I would like us to select the managers in the first quarter, to be prepared for the two alternatives.”
Last year’s bond sale took place after the government’s pledge to narrow the deficit helped cut Czech borrowing costs below those of higher-rated Italy. The previous administration delayed the planned issue in April when concern Greece might default drove up borrowing costs across Europe.
The yield on the euro-denominated notes maturing in April 2021 traded 108 basis points above the mid-swap rate today, little changed from 105 basis points when they were first sold in September. The spread on Italian debt of similar maturity widened to 137 basis points from 116 in the period.
Moody’s Investors Service rates the Czech Republic’s debt A1, its fifth-highest investment grade and two steps below Italy’s Aa2. Standard & Poor’s gives Czech bonds its sixth-highest rating at A, one level lower than Italy at A+.
Slovenia this month sold 1.5 billion euros of debt due in 2021 at a yield 150 basis points above mid-swaps. Moody’s rates Slovenia Aa2, while S&P grades it AA, three steps higher than the Czech Republic.
The Czech euro-denominated bonds are trading “relatively close to the level they were issued at on secondary market, while countries like Slovenia are higher,” Gregor said.
The Finance Ministry plans to cut the deficit to 4.6 percent of gross domestic product this year, down from an estimated 5.1 percent in 2010 and 5.8 percent in 2009, when the recession cut tax revenue and boosted social spending.
Economic growth may slow to 2 percent this year after rebounding to a 2.2 percent expansion in 2010, the ministry estimates.
S&P said on Aug. 10 it may raise the Czech Republic’s ratings if the government follows through on its promises, including an overhaul of the pension system.
The pension overhaul, which aims to strengthen private savings, shouldn’t boost the deficit because the government will seek to increase revenue to compensate for money shifted from the pay-as-you-go program to private accounts, Gregor said.
“If the planned reforms are not carried out, Czech public finances will have a medium-term problem,” Brozka said. “Another escalation of the eurozone’s debt difficulties would also be a risk for the planned Eurobond and could delay the sale similarly to last year.”