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Markets applaud changes

Financial markets gave yet another round of applause to the new government of Premier Mikuláš Dzurinda when yields on Slovak Eurobonds fell sharply in October. In response to the formation of the cabinet, interest yields to maturity dipped from 10.5% to 5% above the five-year German government bonds, Bunds.
"The political situation in Slovakia [before the September national elections] was the main risk for foreign investors to invest here," said Dušan Meszáros, a London-based analyst for the Dutch investment bank ING Barings. "The change in the political orientation of the country has had a significant influence on Eurobond prices."

Financial markets gave yet another round of applause to the new government of Premier Mikuláš Dzurinda when yields on Slovak Eurobonds fell sharply in October. In response to the formation of the cabinet, interest yields to maturity dipped from 10.5% to 5% above the five-year German government bonds, Bunds.

"The political situation in Slovakia [before the September national elections] was the main risk for foreign investors to invest here," said Dušan Meszáros, a London-based analyst for the Dutch investment bank ING Barings. "The change in the political orientation of the country has had a significant influence on Eurobond prices."

The interest yield on the Slovak Eurobond tranche denominated in Deutsch Marks started to fall from 10.5% above the five-year German Bunds on October 19, the day the parties of the former opposition announced their intention to form a new cabinet. After a coalition agreement was signed on October 27, spreads plummeted from 9.3% to 5%.

"It was a typical market reaction to the political changes," said Martin Kabát, an analyst with the Bratislava brokerage firm Slávia Capital. He pointed out, however, that the latest yields were still higher than those of bonds issued by other post-communist countries.

Recent spreads of Hungarian and Polish Eurobonds oscillate around 1.3% over US Treasuries. Slightly higher interest yields are currently being reported for Czech Eurobonds denominated in US dollars, which are traded 2.4% over US Treasuries.

On May 28, the Slovak Republic issued a multi-currency (yen, DEM, USD) Eurobond in a total amount of $570 million. The former government of Vladimír Mečiar issued these securities at an interest yield of 3.5% above Bunds, and their price did not exceed 4% over Bunds before the Russian financial crisis in August and September 1998.

During the Russian crisis, however, yields climbed as high as 10.5% above Bunds. "It was partly because of the crisis, but also because of the pre-election situation in Slovakia," explained Kabát.

The interest yields of Slovak Eurobonds denominated in US dollars copied the development of those denominated in Deutsch marks. However, the spread was higher - up to 6.7% above five-year US Treasuries - because of the lower interest of investors in emerging market debt as well as the poor reputation of Slovak credit. These bonds were issued at an interest yield of 3.7% above US Treasuries, and until the Russian crisis were traded at between 3.79 - 3.8% above US Treasuries.

The securities issued by Slovak construction company Vodo-hospodárska Výstavba Bratislava (VVB) posted a similar development. Ten-year VVB bonds denominated in USD and maturing in 2006 are traded 1% above Slovak Eurobonds denominated in USD, i.e. about 7% over US Treasuries. They were issued with a spread of 1.15%, and were traded with a spread a little over 4% before the Russian crisis. During the Russian crisis, however, their price grew to 8.1%. These securities as well as the three-year VVB Eurobond issued in July 1998 are guaranteed by the Slovak government.

According to analysts, however, the recently favourable Eurobond yield developments do not mean that the state should try to finance the ballooning state budget deficit from foreign sources.

The Finance Ministry has revised the 1998 budget deficit figure to a level 11.2 billion Sk ($320 million) higher than originally foreseen, and Finance Minister Brigita Schmögnerová has proposed issuing "state securities in order to cover this gap." When contacted by The Slovak Spectator, however, officials at the ministry refused to comment on the refinancing of the state budget.

Meszáros and Kabát agreed that domestic rather than foreign sources should be used to cover the budget shortfall. "Eurobonds are just an external liability of the country, and their prices are hugely influenced by the fluctuation of the currency," said Meszáros. He added that the cabinet could not expect to secure foreign resources for cheaper than the current Eurobond rate of 679 basis points above US Treasuries. "Therefore, it would be ideal to cover the deficit with state bonds issued at home and in Slovak crowns," said Meszáros.

Nor do Eurobond yields translate into concrete changes in the attitude of ratings agencies towards Slovak credit. Three major ratings agencies - Thompson's Bankwatch, Standard & Poor's and Moody's - dropped Slovakia from the group of investment grade countries to the rank of speculative nations in 1998.

According to Kabát, ratings agencies and investors would only truly re-evaluate Slovakia after studying the government's programme statement, the full state budget for 1999 and the monetary programme of the National Bank of Slovakia (NBS). "These are the major documents which can positively influence the credibility of the cabinet itself as well as of the entire country," Kabát explained.

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