UPDATE 1-Czech FinMin mulls ways to hike borrowing -source

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By Marek Petrus

PRAGUE, Oct 10 (Reuters) - The Czech Finance Ministry prefers medium- and long-term domestic bond issuance over short-term bill refinancing if it opts out of further foreign borrowing this year, a ministry source said on Tuesday.

The official, who asked not to be identified by name, told Reuters that the ministry might consider adding one or two medium- or long-dated bond auctions to the fourth quarter calendar if it decided to increase local currency borrowing.

The source added no firm decision had been taken yet on what steps to take to cover a projected 18.8 billion crown ($840 million) hike in the government's borrowing requirements to meet unplanned payments before the year-end.

The official said the ministry focused on longer-dated bond borrowing, rather than Treasury bills with a maturity of up to one year, to try and meet its long-standing goal of lengthening the average maturity of state debt.

Investors have been uneasy about the domestic market's ability to absorb the rising supply of government bonds, fed by a burgeoning fiscal deficit.

The ministry said on Monday it needed to boost bond issuance over and above the original 2006 ceiling of 155.5 billion crowns, mainly because of frontloading a guarantee payment to the central bank to keep a lid on the 2007 budget deficit.

Borrowing abroad would run counter to the ministry's pledge to refrain from tapping international debt markets for the rest of 2006, after issuing 30 billion yen ($252 million) worth of 30-year bonds in mid-January in a private-placement transaction.

"In case of no additional foreign issue, the ministry may be talking about adding one or two (medium- or long-term domestic) bond auctions to the calendar, as it does not intend to open a new bond series until next year, apart from the scheduled 3-year issue set for a November launch," the source said.

Any additional funds, if need be, could be raised through T-bill issuance, either on the primary or the secondary market. "T-bills remain a measure of last resort," said the official.

The ministry has previously scheduled auctions offering 44 billion crowns' worth of medium- and long-term domestic bonds between October and December. It usually auctions 5-8 billion crowns worth of paper in one go.

The source said it was up to Finance Minister Vlastimil Tlusty to either confirm an earlier decision to shun foreign markets and boost domestic borrowing, or launch preparation of a new foreign issue, be it a public offer or a private placement. ((Editing by Ian Jones; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; Tel: +420 224 190 477)) ($1=22.38 Czech Crown)

Keywords: MARKETS CZECH BONDS