(Updates with bond market reaction in seventh paragraph.)
Nov. 9 (Bloomberg) -- Slovenia’s next government must cut public spending as the likelihood of the nation sliding into a recession because of the euro region’s debt crisis increases, according to the government’s forecasting institute.
Slovenes will vote on Dec. 4 after Prime Minister Borut Pahor’s government was toppled in a no-confidence vote on Sept. 20. Its failure to cut public spending and the rejection of the pension changes in June prompted credit rating companies to lower the country’s assessment.
The export-driven economy is faltering as demand in Europe weakens after governments embarked on spending cuts to allay investors’ concern over debt sustainability. Gross domestic product weakened to an annual 0.9 percent in second quarter from a 2.3 percent pace in the first three months.
“The key challenge for the new Cabinet will be to consolidate public finances,” Bostjan Vasle, the institute’s director told reporters in Ljubljana today. “We can’t rule out the possibility economic growth will be negative in some quarters as there are visible signs of an economic slowdown in Europe.”
Record Borrowing Costs
Slovenia, a member of the euro region since 2007, had its credit rating cut by all major ratings service since the fall of Pahor’s government because of a poor fiscal outlook, a faltering economic recovery and a weak banking industry. Borrowing costs have hit a record-high as financial turmoil roils neighboring Italy.
The outgoing government aims to narrow the budget deficit to 4.6 percent of total output this year. Slovenia’s public debt ballooned to 44.2 percent of gross domestic product at the end of June, according to the statistics office.
The yield on Slovenian government bonds maturing in 2021 rose to a euro-era record of 6.249 percent at 1:07 p.m. in Ljubljana. The extra yield investors demand compared with similar maturity German debt rose to 460 basis points from 392 basis points a week ago, Bloomberg data show. A basis point is 0.01 percentage point.
“The crisis on the international financial markets is taking its toll on Slovenia’s borrowing costs, but also its own unresolved situation with public finances,” Vasle said.
The former Yugoslav nation is rated AA- at Standard & Poor’s, the fourth-highest investment grade, and an equivalent at Fitch Ratings. Moody’s rates Slovenia at Aa3.
--Editors: Alan Crosby, Douglas Lytle
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