(Updates with bond prices from second paragraph, comment in fifth paragraph.)
Oct. 5 (Bloomberg) -- A rise in Slovenian bond yields since the rejection of pension changes in June probably will hurt public finances, the state forecasting institute warned.
The extra yield investors demand to hold Slovenia’s bonds maturing in 2021 rather than similar-maturity German debt rose to a record 351 basis points, or 3.51 percentage points, in Ljubljana at 12:13 p.m. The spread has more than doubled since voters in June rejected the pension changes in a referendum. The yield on Slovenia’s 1.5 billion euros ($2 billion) in notes maturing in January 2021 advanced 5 basis points today to 5.175 percent, according to Bloomberg data.
“If the premium rises to above 5 percent, that would have a significant impact on public finances,” Bostjan Vasle, the director of the government’s economic institute, told reporters in Ljubljana today. He wasn’t referring to a specific note.
Slovenia, a member of the euro region since 2007, had its credit ratings cut by Moody’s and Fitch last month on deteriorating public finances, political uncertainty, a weak banking industry and a worsening outlook for the economy. The government to emerge from early elections on Dec. 4 will have to hold down spending as the economic outlook worsens and a solution to the European debt crisis eludes policy makers.
“There is great pressure on yields in many European nations and banks and, unfortunately, Slovenia is among them,” Radivoj Pregelj, an analyst at Abanka Vipa said in an e-mail. “And the outlook isn’t bright either.”
Slovenia’s outgoing government of Prime Minister Borut Pahor, which was toppled last month, saw public debt surge to 45.2 percent of gross domestic product in the first quarter on dwindling tax receipts and a greater need for social-benefit spending during the recession. The government aims for a 4.6 percent of GDP budget gap by year’s end, or 5.5 percent under European accounting standards.
“Slovenia is destined for low economic-growth rates in the coming years, which will be just above 1 percent,” Vasle said today.
GDP will expand 1.5 percent this year as demand for Slovenian exports in Europe weakens, the institute forecasts. The central bank has an even lower estimate of 1.3 percent for 2011 with the risk the expansion may be even slower.
Slovenia’s banking industry, which may need fresh capital of 3.1 billion euros according to Fitch ratings, will continue to struggle with bad loans, said Marjan Hafnar, an economist at the institute.
“Bad-loan levels were 25 percent higher in the first eight months of 2011, compared with a year earlier, and it’s very likely the level will be higher by the end of the year than it was at end of 2010,” Hafner said.
-- Editors: James M. Gomez, Alan Crosby
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