As a rule, the bloc’s nations fund their national budget deficits with borrowings from abroad. When all the countries are compared to the Czech Republic, it emerges that it is only in Luxembourg and Romania where there is a greater willingness to lend to one’s own government.
According to European statistical data, financial institutions in the Czech Republic purchase 63 percent of every domestic government bond issue. Another six percent ends up with domestic businesses and individual investors. “The positive aspect of having a high proportion of the domestic debt in Czech hands is that the country enjoys greater protection from external economic jolts. The flip side is the risk ensuing from the high exposure of domestic financial institutions to a single issuer, that being the Czech state in this case,” said Petr Sklenář, Chief Economist at J&T Banka.
According to the finance ministry’s data for June, more than one-third of all Czech government bonds, worth CZK 1.6bn, was stashed away in domestic banks, while another one-third was shared by domestic pension funds and insurers. “In the event of the fiscal situation of the Czech Republic considerably deteriorating, a blow would be dealt to the domestic financial sector,” said Jakub Seidler, Chief Economist at ING Bank Ceska Republika. The Czech National Bank has itself served warning of the increased exposure of domestic financial institutions.
The value of Czech government bonds has very tangibly slumped in recent months. The value of the 10-year bond has declined by eight percent since April. The downward trend seen in government bond prices started to take hold across Europe in early April, causing the values of the bonds issued by all the major European countries to shrink. Government bond price indexes show that since the end of April French bonds have lost more than six percent. Similar developments have been seen in German and Dutch treasury issues.