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Low interest bonds beat company lending

The recent success of T-bill auctions, even at an interest rate of a little over 7%, has confirmed a bleak truth for Slovak firms - the future of government securities will be bright as long as the Slovak banking sector remains unwilling to push money into the country's lacklustre corporate sector.
Oversubscribed July 13 and July 19 issues of 364-day T-bills saw the Finance Ministry pull in around 2.4 billion crowns at a yield hovering around 7.3% per annum to finance budget spending. But with bank bids climbing to 5.03 billion crowns, analysts said the issues proved that the sector's excess liquidity had again bypassed Slovak companies in need of cash.
"The government must be happy with the low interest rate on the T-bills and the demand generated in the T-bills itself, but this is crowding out [lending to] companies," said Miloš Božek of J & T Securities in Bratislava. "The banks are sitting on their money. They have a lot of money but want a secure investment on that money, and the most secure is probably state debt," added Bozek.

The recent success of T-bill auctions, even at an interest rate of a little over 7%, has confirmed a bleak truth for Slovak firms - the future of government securities will be bright as long as the Slovak banking sector remains unwilling to push money into the country's lacklustre corporate sector.

Oversubscribed July 13 and July 19 issues of 364-day T-bills saw the Finance Ministry pull in around 2.4 billion crowns at a yield hovering around 7.3% per annum to finance budget spending. But with bank bids climbing to 5.03 billion crowns, analysts said the issues proved that the sector's excess liquidity had again bypassed Slovak companies in need of cash.

"The government must be happy with the low interest rate on the T-bills and the demand generated in the T-bills itself, but this is crowding out [lending to] companies," said Miloš Božek of J & T Securities in Bratislava. "The banks are sitting on their money. They have a lot of money but want a secure investment on that money, and the most secure is probably state debt," added Bozek.

Slovakia's ailing corporate sector, which international organisations such as the EU, the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Devlopment (OECD) have said is in desperate need of financial assistance for restructuring, has been largely ignored by domestic banks during the current government's 21-month tenure.

Poor bank management and political meddling in the past led to suspect corporate lending and resulted in many financial institutions being saddled with crippling portfolios of non-performing loans. The result has been a deep aversion on the part of banks to lend to Slovak firms, and to sometimes prohibitive interest rates being slapped on any credit extended.

"The banks are still very cautious. The interest rate on loans to corporations is 14%, double the yield on the T-bills, but the banks still seem reluctant [to extend credit] to domestic firms," said Pavel Habšuda, an analyst with brokers Slávia Capital. "The government and the central bank want the loans to start flowing, but there is still this demand for government securities," he added.

However, despite incentives such as the National Bank of Slovakia's (NBS) decision to lower the minimum reserve requirement for banks' holdings at the central bank to 6.5%, ostensibly in a bid to allow them to extend more loans, the outlook for further T-bill and government security sales remains optimistic - a stark contrast to the dim prospects for domestic lending in the near future.

"Companies are hoping that there will be a change in the loan situation, but that remains to be seen," explained Karol Balog, general director of the Agency for Industrial Development and Revitalisation. He said that many firms were still finding it a struggle to obtain new loans, and that the situation had been exacerbated by the reluctance of banks to give new credit while many were undergoing restructuring.

Analysts have pinpointed company offerings of bonds as the real hope for raising financing in the corporate sector.

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