Prague will tap the international bond market for the first time in a decade as steps to curb the government’s budget deficit bolster perceptions of the country’s creditworthiness.
The Czech capital will offer as much as 200 million euros ($260 million) of debt in the first quarter after picking the sale’s managers before the end of this year, said Vladan Kubec, the head of strategy at the city hall’s budget department. Prague is rated A1 at Moody’s Investors Service rates, its fifth-highest grade level and the same as Czech sovereign debt. The yield on the country’s 2022 Eurobonds were little changed at a two-week low of 2.83 percent.
Economic stimulus efforts in Europe and the U.S. and lower yields on top-rated government bonds are driving investors to riskier debt with higher returns. The Czech Republic raised 750 million euros two weeks ago in a reopening of 10-year notes after austerity measures and better European sentiment helped cut the yield to a record 2.51 percent in the third quarter.
“The yield developments in the euro market are favorable to this planned offering,” Kubec said in a telephone interview today. Proceeds from the sale will be used to finance road repairs and the expansion of the subway system, he said.
The cost of insuring Czech debt with credit-default swaps fell to a 16-month low of 79 basis points today.
Prime Minister Petr Necas on Oct. 14 pledged to continue deficit cuts even as a defeat in regional elections this past weekend threatened to weaken his leadership. Necas seeks higher taxes to help cut the deficit below the European Union’s limit of 3 percent of gross domestic product next year for the first time since 2008.
Czech bonds have the highest credit ratings in central and eastern Europe, on par with Estonia, and are the cheapest to insure with default swaps. The contracts, which decline as perceptions of creditworthiness improve, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Prague last sold foreign-currency bonds in 2003 in the amount of 170 million euros, which will mature in March next year, data compiled by Bloomberg shows.