Bonds fill state treasury

The government's treasury is flush with almost zł. 10 billion ($2.4 billion) from a successful debt-financing strategy in the first six months of the year. The amount should allow the country to weather potential decreases in debt demand and continuing difficulties in privatizing state-owned concerns during the second half of 2002, economists said last week. The government has issued zł. 26.7 billion ($6.5 billion) of new debt this year and now has total outstanding obligations of zł. 32 billion ($7.8 billion), putting it in an ideal position should markets worsen, said Jacek Wiśniewski, the head of research at Bank Pekao. "The government is in a very good situation," he said. Robust demand for government obligations indicates bond buyers' continued enthusiasm for new debt issues. Last week, for instance, the treasury conducted a zł. 700 million ($170.7 million) auction of eight-year bonds that was almost three times oversubscribed. The aggregate issuance, or the net amount needed to refinance existing debt obligations, comprises zł. 10.5 billion ($2.6 billion) in treasury bills and zł. 16.2 billion ($3.95 billion) in treasury bonds. The government has already exceeded its targets for treasury bills, owing to a flat yield curve that makes it comparatively cheaper than usual for shorter-term debt. It had planned to raise only zł. 5.8 billion ($1.4 billion) from treasury bills and zł. 26.2 billion ($6.4 billion) from treasury bonds for the whole year.

Such aggressive financing, especially of T-bills, has now left the government with cash reserves in excess of zł. 10 billion ($2.44 billion) - more than in most previous years, economists said. These conditions put the country's financial status on solid ground since any decrease in demand for debt obligations could force the state to pay high coupons on debt issues, they said. Debt and asset sales are two of the government's most important sources of budget revenue. But further doubts about the fiscal direction of the government, such as the recent appointment of Grzegorz Kołodko as finance minister following Marek Belka's surprise resignation, could negatively impact the bond market. If the obligations become too expensive due to falling demand, economists said the government's cash in hand would cushion the blow by allowing it to pare its debt issuance plans. Paweł Kielek, a fixed income analyst at ABM Amro Bank in Warsaw, said that timing is everything when it comes to state fiscal policy affecting debt financing during the remainder of the year. Low income from few privatizations has also affected the bond market. Observers see few state sell-offs the rest of the year. The government expected to partly finance this year's budget deficit of zł. 40 billion ($9.8 billion) with zł. 6.8 billion ($1.7 billion) in proceeds from the sale of state-owned assets. But Poland has not been able to follow through with its plans since global and domestic markets have soured on most initial public offerings and asset sales of any type.