Jan Lopatka, Jason Hovet

PRAGUE (Reuters – Czech treasury plans to add a new euro denominated bond in this year. Also, it will issue treasury notes in euros for first time. This is in order to take advantage of the fact that its debt has been accepted as collateral by the European Central Bank, according the debt chief.

Petr Pavelek (chief of the Finance Ministry’s debt management division) said that separate discussions were underway to determine whether or not the country can increase its total euro borrowing due to a widening interest rate differential.

Czech Republic is facing a third year with high levels of borrowing following the COVID-19 epidemic. Moreover, higher government spending and a sharp rise in state budget deficits caused by increased government spending led to an increase in debt.

A shock from the war in Ukraine, including the influx and displacement of refugees, is leading to an increase in government’s target for a central deficit budget deficit of 280 billion crowns ($12.14 billion).

As inflation rises, the Czech National Bank raises its key rate to 5.75% from 0.25% since June. This has increased borrowing costs.

Pavelek stated that the planned issues will be issued under Czech law and not as the traditional Eurobonds of the past. This is a continuation of a trend seen since 2019, when the ministry began offering Euro-denominated paper at domestic auctions.

This is the preferred option for the ministry when it comes to euro debt.

Pavelek stated that a domestic bond in euro could be issued sooner than existing bonds maturing in 2027 and 2024, possibly even before the summer.

From this spring the ECB made available the euro-denominated existing bonds. After Denmark and the Czech Republic, it was the second noneuro country to receive that inclusion. This means that the bonds are eligible to be used as collateral in Eurosystem operations. Investors will appreciate their attractiveness.

Pavelek stated that although the Czech law allows for printing more than one billion euros, he doesn’t believe it will exceed 1 to 2 billion. Even 1 billion would be sufficient.

He stated that the new issue would partly cover Eurobond’s matured debt rather than raise foreign debt. A sale could be made via auction, syndication, followed by auctions.

Pavelek predicted that this year’s issuance of short-term Treasury bills in euro could be possible. The ministry has also been in discussions with the central banking.

Pavelek stated that the ministry could create a reserve of euro cash, which it could use to swap for crown liquidity whenever necessary. This could be made possible by an efficient foreign exchange swap market.

EURO DEBT DISCUSSION: MORE

Pavelek explained that aside from interest rate differentials there is another reason to think about higher levels of euro debt in future. The fact that overall euro debt has fallen below 7% to date makes it a good idea to take into consideration euro borrowing.

This would be in line with government plans to let companies do their bookkeeping and to pay euros taxes, generating euro revenue for the government.

“This government plan on tax is opening the door to discussion about the potential rise of the euro exposure on the side of the debt. Pavelek explained that the discussion is only just beginning.

According to him, another reason why more euros are being borrowed is government plans for faster defence spending in the war in Ukraine. These funds will be used mainly to buy military equipment abroad.

Pavelek stated that no decision has been made regarding increased borrowing in euro. He also said that the Czech government would not abandon its crown market but instead open up another avenue to increase flexibility.

($1 = 23.0730 Czech crowns)