The Czech treasury is looking at adding a new euro-denominated bond this year and issuing treasury bills in euros for the first time, taking advantage of its debt being newly accepted as collateral in European Central Bank operations, the country's debt chief said on Tuesday.

Separate discussions are also under way on whether the country could boost its overall euro borrowing in light of a yawning interest rate differential, Petr Pavelek, chief of the Finance Ministry's debt management department, told Reuters.

The Czech Republic faces a third year of elevated borrowing after the COVID-19 pandemic and increased government spending caused the state budget deficit to rise sharply.

The government is expected to increase its 280 billion crown ($12.14 billion) central budget deficit target this year due to shocks from the war in Ukraine including an influx of refugees.

The new issues, and any separate shift into more euro debt, come as inflation surges and the Czech National Bank has lifted its key rate to 5.75%, from 0.25%, since last June, boosting borrowing costs.

The planned issues would be offered under Czech law, rather than as traditional Eurobonds used in the past, Pavelek said, boosting a trend since 2019 when the ministry first started offering euro-denominated paper in domestic auctions.

This has become the ministry's preferred course for euro debt needs rather than foreign markets, which it last tapped a decade ago with 10-year bonds to the value of 2.75 billion euros that were repaid this month.

Pavelek said a new domestic euro-denominated bond could have a longer maturity beyond existing issues maturing in 2024 and 2027, and possibly come before the summer.

The existing euro-denominated bonds have been available in the ECB's eligible assets list since this spring, with the Czech Republic only the second non-euro country, after Denmark, to get that inclusion. That means the bonds can be used as collateral for Eurosystem operations, boosting their appeal to investors.

"The plan is there to print something longer under Czech law, but I don't expect it to be bigger than 1 or 2 billion (euros), even 1 billion is sufficient for us this year," Pavelek said.

The new issue would partially cover the matured Eurobond rather than raising foreign debt, and a sale could come via auction or syndication followed by auctions, he said.

The ministry is also in talks also with the central bank to prepare issuance of the first-ever shorter-term Treasury bills in euros, which Pavelek expected could also happen this year.

Pavelek said the ministry could build a "reserve" of euro cash that it could swap into crown liquidity as necessary, helped by a liquid foreign exchange swap market.

MORE EURO DEBT DISCUSSION

Pavelek said apart from interest rate differentials, another reason to look at potentially higher euro debt in the future is the fact that euro borrowing to date has shrunk to below 7% of overall debt.

It would also chime with the government's plan to allow companies to do bookkeeping and pay taxes in euros, giving the government euro revenue.

"This government plan in the area of tax opens the discussion about a potential increase of euro exposure on the debt side. But this is just opening," Pavelek said.

He said another factor for more euro borrowing were government plans to speed up defence spending amid the war in Ukraine, mostly on buying military equipment in foreign currency.

Pavelek said no decisions on increased euro borrowing have been taken, and he said the government was not going to abandon the Czech crown market, but rather open another alley to gain flexibility.

($1 = 23.0730 Czech crowns)