Zero-Percent Club Spreading as Poland Seeks to Emulate AAA Peers

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The world of zero percent borrowing costs is spreading into eastern Europe.

On the tail of AAA ranked countries such as Germany and Switzerland, Poland is now pushing for zero rates or less despite having a credit score six levels lower. A potential debt sale could involve financial derivatives, Deputy Finance Minister Artur Radziwill said in a March 31 statement.

“This is possible as yields are already negative in many European countries,” Katarzyna Rzentarzewska, an analyst at Erste Group Bank AG in Prague, said by phone on Wednesday. “If the offer is relatively attractive, then why not?”

Poland, the European Union’s largest ex-communist country, is benefiting as unprecedented monetary stimulus from central banks in developed economies spurs waves of bond buying. The yield on Polish debt in Swiss francs due February 2016 dropped to a record of minus 0.34 percent last week. The government sold 1 billion euros ($1.08 billion) of Eurobonds due in March 2027 at a yield of 1.02 percent on Monday.

The country is exploring options for sales in foreign currencies either via “direct bond issues or synthetic transactions with the use of hedging” that may reduce yields to or below zero, Radziwill said.

Currency Swaps

A “synthetic” deal could involve issuing bonds in one foreign currency and swapping the proceeds into another to reduce the effective cost of borrowing, Piotr Marczak, director of the Finance Ministry’s public debt department, said by e-mail on Tuesday. He didn’t immediately respond to an e-mailed request for further comment on Wednesday.

Poland will probably seek to issue notes in francs to take advantage of Switzerland’s borrowing costs and rollover the 1.875 billion francs ($1.94 billion) of bonds it has due this year, Erste’s Rzentarzewska said.

Finding buyers for sub-zero percent debt from Poland, which has an A- grade from Standard & Poor’s and Fitch Ratings, may still be difficult, according to Societe Generale SA.

“Global bond investors can invest in anything, so I’m not sure that demand for negative yields from an emerging-market country would be high,” Regis Chatellier, a London-based director of credit strategy at Societe Generale, said by e-mail on Wednesday. “Only private placements targeting specific needs would work, with limited size.”

Cash Reserves

Poland has financed 57 percent of this year’s borrowing needs following this week’s Eurobond sale and holds 55 billion zloty ($14.6 billion) in cash, allowing it to be selective with foreign-debt sales and focus on “getting the best pricing and on diversifying our investor base,” Radziwill said.

While east European sovereigns have never tapped international markets at or below zero percent, the Czech Republic sold three-year koruna-denominated notes at an average yield of 0.01 percent on March 25. Czech bonds are rated three levels higher than Poland’s by S&P and two steps at Fitch.

Asset-purchases by the U.S. Federal Reserve, the Bank of Japan and the European Central Bank have helped push yields on Polish bonds to record lows this year. The rate on benchmark 10-year zloty securities was little changed at 2.31 percent at 9:34 a.m. in Warsaw, leaving the premium over similar German bonds at 214 basis points. The yield on Poland’s new euro-denominated bonds due in March 2027 was 73 basis points above German equivalents.

“Seeing German yields going from zero to negative and the Polish spread being very tight, I wouldn’t exclude the possibility” of Poland gaining financing at a sub-zero rate, Gintaras Shlizhyus, a Vienna-based strategist at Raiffeisen Bank International AG, said by e-mail on Wednesday. Poland may “ride on the tail” of ECB stimulus, he said.

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