Debt Is Enemy No More in Nation Merkel Praised on Austerity

(Bloomberg) -- Czechs are so averse to borrowing that a prime minister once described debt as “public enemy no. 1” and fiscally-astute Germany considered the country a model for budgetary prudence.

Yet less than a decade after an austerity drive tipped the economy into a double-dip recession following the financial crisis, the current government says it’s learned from the mistake.

Prime Minister Andrej Babis’s administration has raised the 2020 budget deficit target three times since March, bringing it to 500 billion koruna ($21 billion), or almost a 10th of the economy.

Debt Is Enemy No More in Nation Merkel Praised on Austerity

“People should learn from mistakes, not repeat them,” Finance Minister Alena Schillerova said in response to questions from Bloomberg. “Our public finances had repeatedly shown structural surpluses before the current crisis. This year, the situation called for a significant fiscal stimulus, which I consider justified given the nature of the crisis.”

With economic output projected to shrink 6.2% this year, according to the European Commission, Babis is funding everything from the wages of furloughed workers to commercial rent subsidies and an extra 1,200 koruna per resident to help cities and towns pay their bills.

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The spending, which has helped the billionaire’s party defend a wide lead in opinion polls before elections next year, is a stark departure for a government that has run surpluses or almost-balanced budgets in the last half decade.

With its German-like aversion to debt, the Czech economy has trailed in terms of economic growth behind regional peers Hungary, Romania and Poland.

Those countries have also pledged stimulus packages amounting to as much as almost a fifth of gross domestic product. But much of that is in loan guarantees. Actual new spending is estimated to be far less than the advertised headline figures, and none have expanded budget targets as much as the Czechs.

Debt Is Enemy No More in Nation Merkel Praised on Austerity

Investors, bolstered by quantitative easing by the world’s biggest central banks, are taking the spending increase in stride. Czech bond actions have been oversubscribed in the past few months, although demand declined this week. The latest sale brought this year’s total issuance of one-year and longer securities to about 517 billion koruna.

Even with the record deficit, the country’s debt will remain one of the lowest in the EU, thanks to years of limited borrowing and economic growth that has exceeded the bloc’s average.

Reservations to more borrowing haven’t disappeared completely. The hard-line leftist Communist Party, which supports the minority government, on Friday quizzed Schillerova about the shortfall and said it had yet to decide whether to endorse it in parliament.

Debt Is Enemy No More in Nation Merkel Praised on Austerity

For now, surplus liquidity in the domestic financial sector and renewed appetite from foreigners are keeping borrowing costs low. The yield premium on 5-year sovereign bonds over similar German securities, at 114 basis points, is half the level before the crisis.

Still, it’s not clear how much of the extra expenditure will be actually deployed and help temper the predicted economic contraction, according to Jaromir Sindel, a Citigroup Inc economist in Prague. And for a country where governments routinely spend less than planned, the deficit may not be as high as projected.

“The proposal looks like a work in progress,” Sindel said in a report to clients.

©2020 Bloomberg L.P.

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