Pilot emission of government bonds sells like hot cakes

The government’s offer of state bonds, enabling citizens to invest in the national debt, has proved hugely successful. After registering orders for more than 16.5 billion crowns, way over the set 10 billion crown target, the Finance Ministry terminated all registrations on Friday, three weeks ahead of the scheduled date. Although public interest surpassed all expectations, critics say it was a costly and unnecessary transaction.

Photo: Barbora Kmentová

The pilot emission includes three bond types: one-year discount savings state bonds, five-year savings coupon state bonds and five-year reinvestment savings bonds. All three bond types have a nominal value of 1 crown, with the minimal investment being 1,000 crowns. The one-year savings bonds have a fixed 2 percent interest rate. Sold in batches of a thousand, the client pays 980 crowns and will receive 1,000 crowns upon maturity. Both five-year bonds have an incremental rate of interest rising each year the bonds are held, from 0.85 percent in the first year to 6 percent in the fifth year. Moreover, due to the nominative price of one crown tax will be negligible. In addition to being a safe investment, they are without doubt more profitable than any other comparable investment on the market.

The emission was offered to individuals of any nationality and Czech and foreign non-profit organizations. The interest it generated surpassed all expectations – after a spate of orders from bigger investors, small savers jumped on the bandwagon as well, registering orders to the tune of 16.5 billion crowns. Only two percent of orders were from NGOs.

Miroslav Kalousek, photo: CTK

Finance Minister Miroslav Kalousek says that the government’s aim was to promote a trend of fiscal responsibility and encourage a significant portion of Czech households to put part of their life savings in state bonds.

“One of our main aims was to give small savers –people who count every crown and can ill afford to part with it - the chance to safely invest some money in the country’s debt and make a healthy profit.”

While Mr. Kalousek can congratulate himself on proving the sceptics wrong, financiers say he paid too high a price. David Marek from Patria Finance says that in order to secure interest in its first emission the government over-bid and every additional order made will cost taxpayers more money in the long-run.

“It is attractive for people, but it is a big mistake for the government because in issuing bonds to the tune of 10 billion crowns the government will create a net loss of 100 billion compared to regular bond issues. Clearly, the higher the demand, the higher the loss for the government, so when issuing the next charge I would expect the government to change the conditions under which it offers bonds to the retail segment in order not to create such losses in the future.”

While some economists see some benefits of the pricey bond emission in revenue diversification, former finance minister and Reifeissenbank’s chief economist Pavel Mertlík says the benefits to the country’s public finances are questionable.

Pavel Mertlík

“I am not sure whether this issue helps public finances even now, because the Czech bond market is very liquid and all regular auctions on the primary market of government bonds are oversubscribed –something like twice or more - the government also plans to come with another tranche of euro bonds before Christmas and regular tranches are selling very well with at much better pricing –so the rationale on the side of the government is questionable. From an economic point of view it doesn’t make any sense.“