S&P upgrades Czech rating: Good news for govt, firms

Petr Holub
26. 8. 2011 11:23
Czech government as well as Czech private companies will have better borrowing conditions after upgrade
Sídlo ratingové agentury Standard and Poor's v New Yorku.
Sídlo ratingové agentury Standard and Poor's v New Yorku. | Foto: Reuters

Prague - Earlier this week, Standard & Poor's upgraded the Czech Republic's rating by two notches, to AA-. This is the fourth highest rating given by the agency, shared by countries such as China, Taiwan, Estonia or Saudi Arabia. The message to investors is simple: buying Czech government bonds is equally safe as buying bonds of any of the other AA- countries.

Also, the upgrade improves the borrowing conditions for Czech companies, which - according to common investment rules - cannot have better rating than the country they operate in.

According to Eurostat, the EU's statistical agency, the Czech Republic was on average paying 3.79 percent for its 10 year-bonds in June. This is 1.05 percent point more than what Germany is paying for its debt.

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Germany's rating with Standard & Poor's is AAA, the highest possible rating.

The Czech Republic's government debt is CZK 1.5mld (EUR 61bil).

In addition, German bond yields face upward pressure by a higher interest rate of the European Central Bank. If the Czech National Bank increased its base interest rate by 0.75 percent point, the Czech government would have to pay 4.5 percent for its debts.

One of the main objectives of the Czech Republic's center-right government, which likes to call itself "a government of fiscal responsibility", has always been to decrease the interest rate the country pays for its debt.

The 3.79 interest rate is already a surprisingly good figure, and the government budget has saved CZK 10bil (EUR 41mil) in the first half of 2011.

Read more: ANALYSIS: Will Czech economy withstand 2nd recession?

After Standard & Poor's rating upgrade, the budget balance may further improve in the second half of the year.

Or, in case the Czech National Bank increases its base interest rate to match the European level, the upgraded rating can prevent the yields from growing.

In theory, more good news may come. Other rating agencies Moody's and Fitch have already given the Czech Republic the fifth best rating, shared by Chile, Korea, Malta, Israel or Slovakia. They can repeat the step done by Standard & Poor's.

This week, Bloomberg quoted RBS' analyst Nick Chamie as saying that a rating upgrade by both Moody's and Fitch can be expected in the following months.

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