* Dealers concerned by scale, timing of finmin tap sales
* Some say risks skewing market, undermining liquidity
* IMF says should stick to announced volumes at tenders
* Dealers see problems, would prefer more transparency
By Jason Hovet
PRAGUE, March 31 (Reuters) - The Czech finance ministry has knocked the domestic bond market off balance by offloading debt to buyers outside of regular auctions, a practice that some players say risks skewing prices and hampering interest in the long-run. Dealers view the so-called "tap sales" as unhelpful in the market's struggle to claw its way back to the sort of liquidity seen before 2008's financial turmoil. They say the sales hinder trading, which the International Monetary Fund has said "remains thin due to the opaqueness of public debt management".
The ministry sells most of its debt in regular auctions, but over the past two years it has also unloaded bonds it keeps on its own books in tap sales to primary dealers to cover around a fifth of domestic issuance.
The strategy is not always clear to the local market players who buy the bulk of government debt. They say it has sometimes tilted the normal supply/demand balance, pushing prices lower and benefitting buyers over sellers.
Seven dealers and local fund managers contacted by Reuters, all of whom asked not to be named, said more transparency on tap sales would be welcome, but they also said the ministry might be better off without them.
"Certainly it kind of ruins the market, because if you don't cover your needs on the market then you always have the option to call the finance ministry," a Prague dealer said.
"If they let the market operate itself it would be much more positive for them long-term because prices would be higher."
IMF SEES PROBLEM
Auction demand this year has been boosted by lower-than- expected issuance, and yields are down about 2 percentage points from a year ago amid a year-long rally in emerging market debt.
But the ministry has worked hard to keep a cap on yields at auctions, selling less than the estimated volume in six sales this year versus only three times in the second half of 2009. It keeps the rest on its books and can instead use it for the tap sales.
The IMF's March annual country report, without mentioning the tap sales, recommended transparency on the market could be improved by "adhering to the announced size of bond issuances, to enable accurate pricing by dealers".
The Finance Ministry shrugged off the IMF report, saying it was "not logical, fair and is not the heart of the matter."
It often calls market players for bids and only details its past sales in quarterly reports. It has gradually reduced the amount it sells as a percentage of issuance since a peak at the end of 2008.
"Tap sales are offered exclusively to all primary dealers with same conditions to all of them," the ministry said in an email to Reuters.
"Tap sales work as small auctions of a 'best price wins' type." It added other debt agencies, like Denmark's, use the practice.
MARKET UNBALANCED
The Czechs are set to borrow a record gross 280 billion crowns this year, a slight increase from 2009, including on foreign markets and some from the European Investment Bank.
The country has had little trouble borrowing during the financial crisis due to a debt load about half the European Union average, when measured by percentage of economic output.
In 2009, the ministry sold 36 billion crowns in tap sales, or 17.7 percent of overall domestic issuance, down from 21 percent in 2008 when it first started detailing the sales.
The practice peaked at 39.1 percent of issuance in the third quarter 2008 just as the financial crisis started swirling -- virtually shutting central Europe's bond markets between October 2008 and March 2009 -- but gradually dropped to 10.1 percent of total domestic issuance in the final quarter of 2009.
In six auctions this quarter, the ministry has sold 41.714 billion crowns in domestic bonds. Of that, 13 percent was bought on its books, according to ministry data compiled by Reuters.
Some dealers said they have learned to live with the tap sales and that the ministry seems to listen more to market demand than in the past.
They also see few alternatives to help the market, which has been plagued by dwindling liquidity in recent years and lower foreign investor interest. But they still dislike the practice.
"The market is not very balanced," another dealer said. "If you want to buy something you can call to the ministry; if you need to sell something you have to go to the secondary market." (Editing by Michael Winfrey and Patrick Graham)