Czech Republic to issue “educative” bonds for citizens

Czech Republic to issue “educative” bonds for citizens

The Czech Finance Ministry plans to issue the first emission of government bonds for  citizens worth no more than CZK 10 bil (EUR 400 mil). The minimum value of a single order will be CZK 1,000.

“We are expecting to be able to offer the first emission in the third quarter of 2011 at the latest. In the first half of the year, we will focus on strong propagation and explanation to the public,” Finance Minister Miroslav Kalousek said.

The ministry will issue two types of bonds, short-term with 1-2 year maturity, and more longer-term with 5-6 year maturity. The interest rates will be determined by the discount rate shortly before the emission.

Kalusek said that the finance ministry’s decision is motivated by weak interest of Czech citizens into buying bonds.

“It is not because we would be desperately looking for new lenders. Our market position is very good,” the minister said, probably in an attempt to clearly distance the Czech Republic from the current euro-zone debt crisis.

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The main goal of the emission is to “increase the fiscal responsibility of the state by its direct relation with citizens’ property.”

According to Kalusek, if a significant part of households has some part of their life-long savings invested in government bonds, they will watch closely the financial management of the state and oppose any populist policies that can depreciate their investments by causing an uncontrolled growth of the government debt.

In the Czech Republic, households and small investors hold 1.2 percent of the total government debt, which is significantly less than in many other developed countries, such as Canada, Germany, Austria, USA, Sweden, Hungary or Poland.

“The pilot emission of bonds will be distributed exclusively by banks,” Kalousek said.

Financial analysts agree that the determining factor for households will be the interest rate.

According to Kalousek, short-term bonds should be competitive with banks’ saving accounts which usually offer interest rates below two percent. Long-term bonds should be even more profitable.

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Also, the analysts spoke to expressed their skepticism about Kalousek’s argument that people who hold government bonds watch more closely the state’s financial management. “I believe that even Mr Kalousek himself knows very well that this is not very realistic. Even though the idea of an angry crowd of bond-holders defenestrating the finance minister is rather interesting,” said Aleš Túma from the Partners consulting firm.

“By issuing bonds for households, the finance ministry wants to broaden the ways government debt is financed to avoid relying too much on financial markets that do not forgive too many mistakes. All other arguments are only covering up this real motive,” said David Marek from Patria Finance.

Read more: Czech 2010 deficit can be 5.1 % of GDP: Minister

Read more: 2011 budget: Czechs living more and more beyond means



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