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MONEY, FOREX MARKETS

Finance Ministry's wastefulness keeps long-term money expensive

The interbank money market experienced a two-week period of moderate trading without many dramatic developments. Altough short-term maturities of up to one week remained volatile, they remained at lower levels compared to long-term deposits. Short-term rates copied the developments of the past few months as a short-term liquidity surplus pushed them to zero percent shortly before the end of the two-week minimum reserve requirement (PMR) period ending on April 15.
Long-term maturities hovered at a high level, moving between 18.5 and 22.5 percent. The yields accepted by the Finance Ministry at auctions of state securities remain the main factor that is keeping long-term money expensive. It seems that the state is willing to pay as much as 26 percent for one-year money, which is much more than anyone else on the market can pay.

The interbank money market experienced a two-week period of moderate trading without many dramatic developments. Altough short-term maturities of up to one week remained volatile, they remained at lower levels compared to long-term deposits. Short-term rates copied the developments of the past few months as a short-term liquidity surplus pushed them to zero percent shortly before the end of the two-week minimum reserve requirement (PMR) period ending on April 15.

Long-term maturities hovered at a high level, moving between 18.5 and 22.5 percent. The yields accepted by the Finance Ministry at auctions of state securities remain the main factor that is keeping long-term money expensive. It seems that the state is willing to pay as much as 26 percent for one-year money, which is much more than anyone else on the market can pay.

On April 7, the ministry sold a 2.17 billion crown tranche ($ 61 million), satisfying almost the entire demand of 2.42 billion crowns. The average accepted yield rose to 25.22 percent from 24.66 pecent accepted at a similar auction on March 31. The maximum accepted rate was 25.999 percent. The yields accepted at the April 14 auction were similarly high, with the average yield edging up to 25.75, while the maximum yield again hit 25.999 percent.

The National Bank of Slovakia (NBS) has repeatedly added liquidity to the money market via two-week refinancing repo tenders, largely eliminating the outflow of funds through state securities auctions. The NBS held two refinancing operations during the week ending April 17, adding around five billion crowns to the market. Most funds entered the market at around 19 percent interest. The outlook for the next few weeks is unchanged as the state's need to refinance state budget expenditures through the market remains the prime mover of money market rates.

The long-planned launch of the Slovak Eurobond issue might put an end to the state budget's hungrily tapping the local money market, as funds from this benchmark bond issue can be added to budget revenues. The Finance Ministry said at the end of March that it planned to increase the volume of the bond issue to between $500 million and $1 billion, from the originally planned $250 to $300 million.

That announcement came within days of Moody's Investors Service downgrade of Slovakia's credit rating to the highest speculative rating from the lowest investment grade. Moody's downgrade influenced foreign exchange market developments, with the crown sharply weakening against its mark/dollar basket parity. But crown purchases by foreign investors at around minus 3 percent against the midpoint helped the crown firm back to around minus 2 percent. After the rebound, the crown rested in a narrow margin of between minus 1.95 and minus 2.20 percent against the basket parity.

The NBS Trade and Foreign Exchange Director, Karol Mrva, said the central bank expected the crown to hold stable between two and four percent on the depreciation side of the currency's plus/minus 7 percent fluctuation band. The crown developments are regulated by the central bank's daily fixing and forex market liquidity remains very low. Therefore the market expects that the crown will move within the range that the central bank deems appropriate, and forecasts that this situation is likely to stay unchanged at least until September elections.


Oto Mohňanský is a forex dealer, currently with Slovenská sporiteľňa.

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