(Adds quotes from FinMin, details, analyst, updates crown)
By Jan Korselt
PRAGUE, April 9 (Reuters) - The Czech government agreed on
Wednesday to divert its foreign currency income from the foreign
exchange market, hoping to cap upward pressure on the crown.t
Finance Minister Miroslav Kalousek said the cabinet approved
a deal with the central bank (CNB) to use the few tools it has
to stem the crown rise, which the bank sees as excessive despite
strong growth of the central European economy.
"The government approved ... an agreement with the CNB on a
package of measures that will to the largest possible extent
work against the firming currency trend," Kalousek told a news
conference.
"The measures will lead to public sector operations being
conducted outside the foreign exchange market," he said.
News of the agreement sent the crown 0.4 percent lower to a
one-week low against the euro of 25.225 <EURCZK=>. It later
climbed back to 25.115 at 1230 GMT, as the details confirmed
earlier reports of the content of the package and the market
view that it would not have a big impact.
The deal is mostly a revision and expansion of an earlier
agreement from 2002 when the crown also rose sharply.
Kalousek said the government would freeze future
privatisation revenues at a foreign currency account at the
central bank and keep the money there to fund pension reforms.
Any government cash needs will be satisfied by swaps, which
can be rolled into the future, ideally until the country adopts
the euro currency some time after 2012.
The government plans to restart the privatisation process,
offering to sell Prague Airport, worth estimated several billion
dollars, national carrier Czech Airlines and other companies.
The government will also convert expected subsidies from
European Union funds, such as money for building roads, into the
central bank reserves, bypassing the market.
It will also secure that no public institutions pre-hedge
expected EU subsidies on the market by selling euros ahead of
time.
EUROBONDS HEDGED
The crown has gained 9.7 percent to the euro over the past
year, a pace that the central bank has said was excessive.
The currency has been driven by the central European
country's strong economic growth, which reached 6.5 percent last
year, and exports rising at a double-digit speed.
The government also agreed to hedge any future eurobond
issues against currency swings. Hedging a eurobond by buying
euros for repayment in a forward contract after converting the
proceeds to crowns would mitigate impact on the market.
Government officials have been saying a eurobond was an
option this year but have given no details. The Finance
Ministry's debt strategy leaves the room open to raise up to
89.9 billion crowns in foreign debt this year.
Analysts said the deal would not put any big dent into the
currency.
"If you do not believe that privatisation expectations are
behind the crown's firming, and we do not, the agreement does
not have a chance to swing the currency," said Ceska Sporitelna
analyst Martin Lobotka.
"The crown is in the hands of speculators, it is popular in
the situation of the weak dollar, because the economy has good
fundamentals."
-- Text of agreement (in Czech) at www.cnb.cz
(Additional reporting by Martin Dokoupil and Petra
Vodstrcilova, writing by Jan Lopatka, editing by David
Christian-Edwards)
