(Adds analyst, details on previous deal, updates crown)
By Jan Lopatka
PRAGUE, March 18 (Reuters) - The Czech central bank (CNB)
and the finance ministry said on Tuesday they were working on a
deal to stem the crown currency's rise, sending it sharply lower
against the euro.
Central bank Vice-Governor Mojmir Hampl told Reuters that
the bank was proposing leaving privatisation income in euros,
not converting European Union subsidies into crowns on the
market and not issuing government Eurobonds.
Central bankers have said the crown has risen far beyond
levels supported by the country's healthy economic growth.
But it was the first time in years that the bank has sought
a deal on stemming the rise by concrete measures, an update and
expansion of an old agreement that diverted privatisation flows
and delayed Eurobond issuance earlier this decade.
"It should be ideally an agreement between the Czech
National Bank and the entire cabinet, not just the Finance
Ministry," Hampl said in a telephone interview.
The agreement should also guarantee that public institutions
receiving money from EU development funds should refrain from
hedging operations on the market.
Finance Minister Miroslav Kalousek confirmed a deal was
"being born".
"We have several points with (central bank Governor Zdenek
Tuma) that we want to agree on," Kalousek told Reuters.
"I want to submit them to the cabinet as an agreement
between the government and central bank (on) using the few
instruments that the government and the central bank may have to
slow down the pressure on crown firming."
The crown lost ground after Hampl's comments and dropped
further after Kalousek confirmed the deal was being negotiated.
It hit a one-month low of 25.48 to the euro before
recovering to 25.455 at 1710 GMT from 25.065 late on Monday.
"The CNB is sending a signal that it is ready to do
something," said Jan Vejmelek, head of economic and strategy
research at Komercni Banka.
"The result of all the proposals would be that the market
would not be so flooded with euros and speculation on crown
firming for those reasons should disappear."
The Finance Ministry has been considering issuing Eurobonds
this year, although market watchers said the domestic debt
calendar for the second quarter seemed to indicate a Eurobond
was not on the agenda for the moment.
FAST CURRENCY RISE
The crown has gained 8.7 percent against the euro over the
past year and hit all-time highs at 24.83 earlier this month,
becoming a major anti-inflationary factor at a time when annual
inflation spiked to 7.5 percent.
The country has enjoyed over 6 percent growth in the past
three years, but is expected to slow to 4-5 percent in 2008 as
government reforms bite into spending, the crown tightens
monetary conditions and western Europe's economy cools.
Under the previous deal from 2002, the government diverted
privatisation inflows from the market, including the sale of
telephone firm Cesky Telecom in 2005, and also for some time
refrained from tapping the Eurobond market.
Leaving privatisation income in euros until eventual euro
entry, expected after 2012, could be acceptable to the
government as it wants to keep at least some of that income
stashed away to pay for planned pension reforms.
The cabinet will discuss in the coming weeks privatisation
plans including the sale of the Prague Airport, valued at
several billion dollars, which central bank Vice-Governor
Miroslav Singer has said may be already boosting the crown.
(Additional reporting by Jan Korselt, editing by Ian Jones)
