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PROCEEDS OF EUROBOND ISSUE GIVE FINANCE MINISTRY ROOM TO BREATHE

Government squeezes domestic bond yields

For nearly a year, the cash-hungry Slovak government has been forced to pay exorbitant interest rates on the domestic market to feed the ever-increasing state debt. But with a $750 million windfall from a recent Eurobond issue safely under its belt, the government has turned the tables: the Finance Ministry can now afford to ignore Slovak banks that are not willing to purchase government securities at yields of less than 20% interest.
However, bank dealers and analysts say that the cash surplus produced by the foreign funds will not last long, and argue that once the money runs out, the government will have to return, hat in hand, either to foreign creditors or to domestic markets and their high rates.

For nearly a year, the cash-hungry Slovak government has been forced to pay exorbitant interest rates on the domestic market to feed the ever-increasing state debt. But with a $750 million windfall from a recent Eurobond issue safely under its belt, the government has turned the tables: the Finance Ministry can now afford to ignore Slovak banks that are not willing to purchase government securities at yields of less than 20% interest.

However, bank dealers and analysts say that the cash surplus produced by the foreign funds will not last long, and argue that once the money runs out, the government will have to return, hat in hand, either to foreign creditors or to domestic markets and their high rates.

Teaching banks a lesson

"Between March and May, the yields on government one-year bonds went up from 23% to 28%," said Patrik Banári, a dealer with Credit Lyonnais Slovakia. "By the end of May, the Ministry was still accepting interest rates of around 27%. And then, suddenly, on three consecutive auctions of government bonds, they did not accept anything."

In actual fact, after two completely unsuccessful auctions held on May 26 and June 2, bonds worth a puny 160 million Sk were sold at the June 9 auction. The average interest rate the government accepted for them dropped to 19.8%. The Ministry did not accept any of the remaining offers, worth 6.4 billion Sk, because the potential buyers demanded interest rates in excess of 20%.

"I think the buyer [of the 160 million Sk bonds] was either a corporation owned by the government or some government-friendly bank," said Banári. "In any case, I am sure [the trade] had been agreed beforehand. It was not a usual purchase, but clearly a display of power to let us know the level of yields the ministry is willing to accept." Ministry spokesman Jozef Mach was not available for comment, but a government analyst who wished to remain anonymous confirmed Banári's judgement.

Similar developments were observed at auctions of treasury bills, or short-term government securities. According to Reuters, the Ministry rejected all bids at five consecutive auctions before the June 17 bargain.

Hole in the purse

The show of bravado might not last long. "The situation on the market is going to be very interesting in July and August," said Marián Tatár, a dealer with ING Bank, explaining that bonds worth more than 8 billion Sk would mature in August alone. What is more, the government immediately used most of the proceeds of the Eurobond issue to pay off some of the loans it had taken to bridge the period until the issue. The amount left in the ministry's coffers is $350 million, which is about 12.2 billion Sk.

Banári agreed with Tatár. "We tried to calculate how long this money is going to last and we came up with July or August as the time when it runs out," he said.

What happens then is anybody's guess. Tatár's opinion was that the ministry would stick to its guns until the national elections scheduled for the end of September. "They will not accept anything above 20% until then, even though most investors see minimal realistic rates somewhere around 21-22%, where they used to be last year," Tatár said. "If they're out of money, they will probably go abroad again and get a temporary loan."

But both Banári and the government analyst disagreed with Tatár's forecast of foreign borrowing. "I think the ministry will return to the domestic market to roll over debt, and rates may climb back to 25%," said Banári.

As the government source explained, "I think it is politically unfeasible to use foreign markets at this time. The government would now rather pay exorbitant rates on the domestic market than go abroad. In this country, the former tactic does not make the front pages of the newspapers, whereas the latter does," he said.

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