2022 – Czech privates discuss more euro debt as issuance toolkit expands By Reuters

Written by Jason Hovet and Jan Lopatka

PRAGUE (Reuters) – The Czech Ministry of Finance is considering adding a new issuance of euro-denominated bonds this year and issuing euro-denominated treasury bills for the first time to take advantage of its newly accepted debt as collateral in European Central Bank operations. Be debts that the boss said on Tuesday.

Peter Pavelik, head of the Treasury’s debt management division, told Reuters there were separate discussions on whether the country could increase its overall euro debt amid a large interest rate differential.

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

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

The new issuance and each separate shift in more euro debt comes with higher inflation and the Czech National Bank raising its key interest rate to 5.75% from 0.25% since last June, driving up borrowing costs.

Pavelik said the proposed issues would be offered under Czech law and not as traditional European bonds used in the past, reinforcing the trend since 2019 when the ministry first began offering euro-denominated notes at local auctions.

This has become the ministry’s preferred position in terms of euro borrowing needs versus overseas markets it last used a decade ago, with 2.75 billion euros in 10-year bonds redeemed this month.

Pavelik said the new euro-denominated domestic bonds could have a longer maturity beyond the current issues, which mature in 2024 and 2027, likely to come before the summer.

Existing euro-denominated bonds have been available on the European Central Bank’s list of eligible assets since this spring, with the Czech Republic becoming the second non-euro country after Denmark to receive that inclusion. This means that bonds can be used as collateral for the operations of the euro system, making them more attractive to investors.

“It is planned to print a little longer under Czech law, but I don’t expect it to be greater than one or two billion (euro), even one billion is enough for us this year,” Pavelik said.

He said the new issuance would partly cover maturing Eurobonds rather than incurring external debt, and the sale could take place through an auction or joint offering followed by auctions.

The ministry is also in talks with the central bank to prepare for the issuance of the first-ever short-term euro treasury bonds, which Pavelik expects to also be issued this year.

Pavelik said the ministry could create a “reserve” of euro cash that could be swapped for krona cash when needed, backed by the liquid foreign exchange market.

More discussion of European debt

Pavlik said that apart from the interest rate differential, another reason to consider the possibility of higher euro debt in the future is that euro borrowing has shrunk to less than 7% of total debt so far.

It would also be in line with the government’s plan to allow businesses to keep accounts and pay taxes in euros, while giving government revenue in euros.

โ€œThis government tax plan opens up the discussion about a possible increase in exposure to the euro on the debt side. But this is just the beginning,โ€ Pavelik said.

Another factor behind the increased euro borrowing, he said, is the government’s plans to speed up defense spending amid the war in Ukraine, primarily through the purchase of foreign currency military equipment.

Pavelik said no decisions had been taken on increasing euro borrowing and said the government would not abandon the Czech koruna market but would open another path to gain flexibility.

($1 = 23.0730 CZK)