Czechs see jump in 2007 bond borrowing

By Marek Petrus

PRAGUE, Oct 4 (Reuters) - The Czech Republic may hike local currency government debt issuance by up to 41 percent next year, the 2007 budget draft projections showed on Wednesday, raising concern over the market's ability to absorb the rising supply.

The government's funding requirements look set to shoot up due to a forecast widening in the public sector deficit to 4 percent of gross domestic product (GDP) in both 2006 and 2007, fed by rising social spending.

The draft called for the government to borrow 118.5 billion crowns ($5.33 billion) through new medium- and long-dated domestic government bonds next year, up from this year's expected issuance of 84 billion crowns worth of new bonds.

But analysts said domestic bond issues would be lower if the European Union member taps the Eurobond market with a sovereign debt offering next year as the finance ministry has signalled.

"Given many uncertainties over the budget, it would be a mistake to see this as final bond projections, not only in terms of volume but also the structure as there may still be a foreign bond issue," said Anne-Francoise Blueher at Komercni Banka.

The finance ministry said last month it would only borrow abroad if market conditions are favourable, especially compared with the local currency market where low credit costs have enabled the government to raise relatively cheap funds.

Long-dated domestic debt yields have traded only 15-20 basis points above euro zone benchmarks thanks to credible monetary policy and lower Czech short-term policy rates, leaving the government's debt financing costs the lowest in central Europe.

'TURBULENCES' AHEAD

The news failed to upset the market <0#CZBMK=> but Blueher said the projected rise in issuance might yet weigh on bonds and cause them to cheapen relative to interest rate swaps <CZKIRS>.

The announcement came just before bidding closed in the first round of the primary offer of the 9-year benchmark bond <CZ9YT=RR>, but all paper was placed and investor demand reached 2.4 times the offered amount [ID:nL04284043].

"For the market these projections may anyway cause some turbulences, because the number is quite big and it is questionable whether the market will be willing to absorb it," said Komercni's Blueher.

A four-month-old parliamentary stalemate has crippled policymaking in the country and fanned investor concerns that no fundamental reforms to the deficit-ridden budget are likely any time soon, which may undermine the country's credit ratings.

The bond borrowing projections for both 2006 and 2007 are net of redemptions of bonds maturing in the given year, which the ministry has traditionally replaced with newly issued notes.

The finance ministry would have to raise domestic issuance over and above 118.5 billion crowns if it decides to roll over two government bond issues, worth a total of 43 billion crowns, maturing in March and August next year <CZ1000723=><CZ1000863=>.

Another 10 billion crowns worth of new bond issues would be needed next year if the ministry seeks to replace two maturing notes <CZ3700627=><CZ3700858=> issued by the state debt restructuring agency, Ceska Konsolidacni Agentura (CKA).

((For TABLE detailing the borrowing projections, double click on [ID:nPRA000957]))

((Editing by Ruth Pitchford; 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=22.22 Czech Crown)

Keywords: MARKETS CZECH BONDS