(Updates with bank comment in second paragraph, market reaction in fifth paragraph.)
Nov. 2 (Bloomberg) -- Slovenia faces uncertainties in its efforts to reduce spending because of recent credit rating cuts, which have pushed up government bond yields to a record and is making government and private sector financing more expensive, the central bank said.
“Even though government debt is much lower than in other euro-region countries, its fast increase needs to be tackled,” Banka Slovenije said in an e-mailed statement today. “The cost- saving measures are based on a short-term decrease in investment costs, so the government needs to adopt long-term measures to lower the deficit in line with the stability and growth pact.”
A slowing global recovery is “negatively” impacting the Slovenian economy as exports lose momentum and manufacturing growth worsens, the bank said.
Slovenia, a member of the euro region since 2007, had its credit rating cut by all major ratings service since the fall of the government of Prime Minister Borut Pahor on Sept. 20 on poor fiscal outlook, faltering economic recovery and a weak banking industry. The new government to emerge from the early elections next month will have to tackle spending cuts as borrowing rose to a record.
The extra yield investors demand to hold Slovenia’s bonds maturing in 2021 rather than German debt with a similar maturity rose today to a record 391 basis points, or 3.9 percent, according to Bloomberg data. The difference was at 147 basis points in June, when voters rejected pensions changes the government deemed crucial to cut spending.
The outgoing government aims to narrow the budget deficit to 4.6 percent of total output this year, or 5.5 percent measured by European accounting standards. Slovenia’s public debt ballooned to 44.2 percent of gross domestic product at the end of June, according to the statistics office.
Slovenia’s economic recovery is faltering as demand for its goods in Europe weakens and the sovereign debt crisis impacts confidence among companies and consumers. Growth slowed to 0.9 percent in second quarter from 2.3 percent in the first three months. GDP is forecast to advance 1.5 percent in 2011 according to the government’s economic institute.
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