UPDATE 2-Czechs mull foreign bond to curb domestic issuance

(Writes through with quote on foreign bond, background)

By Marek Petrus

PRAGUE, Dec 1 (Reuters) - The Czech Republic will consider returning to international debt markets in 2007 to curb local currency bond borrowing and help fund a deepening fiscal gap, the government said on Friday.

The European Union member country, rated 'A-' by Standard & Poor's, raised 2.5 billion euros through 10-year and 15-year benchmark Eurobond issues in 2004-2005 but opted out of tapping the public foreign debt markets this year.

Net of redemptions of bonds falling due in 2007, borrowing through medium- and long-term local currency bonds could rise to up to some 110 billion crowns from this year's expected net issuance of about 100 billion. But in its debt financing plan, the finance ministry said domestic issuance would only rise to the ceiling -- 152.8 billion crowns including debt rollovers -- if it refrains from a public foreign issue as it did this year.

The plan left the room to raise zero to 80 billion crown equivalent of foreign debt next year, which analysts said created a big enough buffer for the government to scale back domestic issuance if need be to keep yields from increasing.

The local market took the announced debt targets into its stride, with debt yields <0#CZBMK=> little changed on the day.

"It does make sense to issue abroad to diversify debt and help cut net issuance in local currency," said Radomir Jac, chief analyst at PPF Asset Management.

"The maximum 80 billion crown equivalent is much more than the ministry was likely to need in any case. I would say they could do with issuing another 1 billion euros."

WAITING FOR NEW GOVT

The ministry raised the odds on borrowing abroad by saying that only "exceptionally" favourable conditions and a "significant surplus of demand over supply" on the domestic market would prevent it from making another foray into foreign markets.

"An additional possibility may also be the realisation of cost effective private placements with selected strategic investors," said the ministry's debt strategy.

The country issued 30 billion yen ($258.2 million) worth of 30-year bonds in a private placement transaction in mid-January.

In September, a ministry official said a Eurobond offering in 2007 was possible, market conditions permitting, to aid financing of the fiscal shortfall. It is forecast to widen to 4 percent of gross domestic product in 2007.

But any foreign issue was likely to be delayed until after feuding parties have resolved a six-month political deadlock and formed a government capable of winning parliamentary support.

An inconclusive general election in June sparked a government crisis, which has left the country with no approved government and crippled policymaking, leaving the fate of any fiscal reforms in the air.

Despite the political limbo, bond prices have benefited from healthy appetite for central European credit from investors betting on long-term asset-price convergence with the single currency area, which Czechs expect to join sometime after 2010.

Yields on the outstanding 15-year Eurobond <CZ021515329=> have fallen to 9-month lows around 4 percent, paying a premium of some 19 basis points to the euro benchmark <EU15YT=RR>. ((Editing by Ron Askew; 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=116.21 Yen) ($1=21.19 Czech Crown)

Keywords: CZECH BONDS/