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Czech Watch - 29 March 2001

29.3.2001 10:18

The international rating agency Fitch downgraded the long-term local currency rating of the Czech Republic to “A” from “A+”. The long-term foreign currency and short-term ratings have been affirmed at ‘BBB+’ and F2, respectively. The outlook is Stable. The downgrade was prompted by the sharp fiscal deterioration expected this year and the subsequent increase in the government’s domestic debt. Fitch says the authorities will be forced to rely more on debt financing than is envisaged in the budget. According to Fitch, the short-term fiscal outlook is the worst of any sovereign in the local currency rating peer group. Fitch warned that a number of factors put the medium-term fiscal outlook at risk. The factors include contingent liabilities in the form of loan guarantees and hidden liabilities of public sector institutions, inevitable reform of some of the country’s largest enterprises, or a more than 70% share of mandatory expenditures in central government spending.

The chairwoman of the European Parliament’s Economic and Currency Committee Christa Randzio-Plath said that a new Czech law increasing politicians' influence over the central bank must be amended to bring it into line with European Union treaties. The controversial law, which took effect in January, has already been attacked by the Czech President, who appealed to the Constitutional Court, and by the European Commission. The law, approved by parliament over a Senate and presidential veto, says the ČNB must agree inflation targets with the government, and makes its operating budget subject to parliamentary approval. It also gives the right to nominate the bank's governing board to the cabinet. "The treaty is quite clear. You have to be independent from political instructions and you also haven't the right to ask for political instructions," quoted Reuters Ms. Randzio-Plath.

The Czech Finance Ministry Deputy Jan Mládek said that the European Bank for Reconstruction and Development (EBRD) could take 5 to 20 % in Transgas. Mládek expects binding offers to arrive in the third quarter of the year with the sale to be concluded at the end of 2001 or early in 2002.

The Czech crown weakened following a midday Fitch downgrade of the country's long-term local currency rating but rebounded later as the market looks to foreign investment for continued upward pressure on the crown, expects a 25bps ECB rate cut and listens to continuing favorable macroeconomic news on the Czech economy. Late on Wednesday CZK was trading at 34.32/34 to the EUR and up from late Tuesday's 34.37/40. The CZK/USD was at 38.61/62 in the evening or down from 38.45/48 late Tuesday. Dealers say the cost of ČNB intervention against CZK would outweigh the rewards.

Bonds closed mixed. The longest state 6.95/16 bond rose 15bps to 107.70/00, yielding 6.14/11 %, State 6.75/05 went down 15bps to 104.50/80, yielding 5.43/34 %. Bonds lost in the morning under influence of the Fitch downgrade, but recovered in the afternoon. There have been speculations that if ČNB does not cut its key rates on Thursday, negative market sentiment can become more widespread.

late March 28 bond yield late March 27
State 6.75/05104.44/745.44/36104.51/81
State 6.95/16106.79/096.23/20107.12/42

(Martin Kupka)

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