EXCLUSIVE Czechs discuss bigger euro debt as issuance toolbox grows


PRAGUE, May 31 (Reuters) – The Czech Treasury plans to add a new euro-denominated bond this year and issue euro-denominated treasury bills for the first time, taking advantage of the fact that its debt has just been accepted as guarantee in the operations of the European Central Bank, the country’s debt chief said on Tuesday.

Separate discussions are also underway on whether the country could increase its overall euro borrowing in light of a gaping interest rate differential, Petr Pavelek, head of the management department at the Bank, told Reuters. debt of the Ministry of Finance.

The Czech Republic is facing a third year of high borrowing after the COVID-19 pandemic and increased government spending has led to a sharp increase in the state budget deficit.

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The government is expected to increase its central budget deficit target by 280 billion crowns ($12.14 billion) this year due to shocks from the war in Ukraine, including an influx of refugees.

The new issues, and any separate shift to more euro-denominated debt, come as inflation rises and the Czech National Bank has raised its key rate to 5.75% from 0.25% since last June. which drove up borrowing costs.

The planned issues would be offered under Czech law, rather than the traditional eurobond form used in the past, Pavelek said, reinforcing a trend since 2019, when the ministry started offering euro-denominated paper. in national auctions.

It has become the department’s preferred route for debt needs in euros rather than foreign markets, which it last tapped a decade ago with 10-year bonds worth 2 .75 billion euros that were repaid this month.

Pavelek said a new national euro-denominated bond could have a longer maturity beyond existing issues maturing in 2024 and 2027, and possibly arrive before the summer.

Existing euro-denominated bonds have been available on the ECB’s list of eligible assets since this spring, with the Czech Republic only the second non-euro country, after Denmark, to gain this inclusion. This means that the bonds can be used as collateral for Eurosystem operations, which increases their appeal to investors.

“The plan is there to print something longer under Czech law, but I don’t expect it to exceed 1 or 2 billion (euros), even 1 billion is enough for us this year” , said Pavelek.

The new issuance would partially cover the maturing eurobond rather than increasing foreign debt, and a sale could be by auction or syndication followed by auction, he said.

The ministry is also in talks with the central bank to prepare for the issuance of the first-ever shorter-term treasury bills in euros, which Pavelek said could also take place this year.

Pavelek said the ministry could build up a “reserve” of euro cash which it could exchange for Crown cash if needed, aided by a liquid currency exchange market.

Czech bond yields rose last year

MORE EURO DEBT DISCUSSION

Pavelek said that aside from interest rate differentials, another reason to consider potentially higher euro debt in the future is the fact that euro borrowing to date has fallen below 7%. global debt.

It would also fit with the government’s plan to allow businesses to do their accounting and pay their taxes in euros, giving the government revenue in euros.

“This government plan in the fiscal area opens the discussion about a potential increase in exposure to the euro on the debt side. But that is only opening up,” Pavelek said.

He said another factor for more euro borrowing was the government’s plans to ramp up defense spending amid war in Ukraine, mainly to buy military equipment in foreign currency.

Pavelek said no decision on increased euro borrowing had been made, and he said the government was not going to abandon the Czech koruna market, but rather open another way to gain flexibility. .

($1 = 23.0730 Czech crowns)

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Reporting by Jason Hovet and Jan Lopatka; Editing by Susan Fenton

Our standards: The Thomson Reuters Trust Principles.

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