July 7 (Bloomberg) -- Poland increased its sale of dollar bonds by 25 percent to $2 billion after investors placed orders for four times that amount, helping the European Union’s largest eastern economy to plug its growing budget deficit.

The 10-year debt was priced to yield 290 basis points more than similar-maturity U.S. Treasuries, according to Bloomberg data, almost five times the spread of 59.8 basis points when Poland last sold dollar bonds in 2005.

Poland joins emerging-market governments from South Africa to Qatar that have raised almost $40 billion in international bonds so far this year, the most since 2005, as evidence of an easing in the global recession drives investors to seek higher returns, Bloomberg data show. The cost for Poland to borrow soared last year with spreads on the existing 2015 dollar bonds quadrupling to 416 basis points as the global credit crisis hurt the region’s banks and sent currencies plunging.

“The sentiment toward east European markets seems to be improving,” said Thomas Kirchmair, a fund manager at Deka Investment in Frankfurt who helps oversee the equivalent of $4.9 billion of emerging-market assets. “Poland and the Czech Republic are two best countries in terms of credit quality while in other states like the Baltics and Ukraine, the adjustment process may take longer and be more painful.”

Poland needs funds as it faces a 48 percent deeper budget shortfall than the government had planned earlier this year. The country signed a one-year, $20.6 billion flexible credit line from the International Monetary Fund in May to shield its economy and currency from the credit crisis.

Tighter Than Korea

“Poland is a good issuer, with few financing issues,” said Edwin Gutierrez, who manages about $5.5 billion in emerging-market debt for Aberdeen Asset Management Plc in London and put orders in for the bonds as part of a total book “in excess of $8 billion.”

The country is rated four levels above non-investment grade at A- by Standard & Poor’s and Fitch Ratings, and one level higher at A2 by Moody’s Investors Service.

South Korea sold 10-year dollar bonds with the same A2 rating from Moody’s on April 9, raising $1.5 billion at a yield 437.5 basis points over U.S. Treasuries, Bloomberg data show.

Since then, the extra yield investors demand to own developing nations’ bonds instead of U.S. government debt has dropped about 130 basis points, hitting a year-low of 407 basis points on June 10, according to JPMorgan Chase & Co.’s EMBI+ index.

Default Swaps

“The market is generally comfortable with the $2 billion size of the Poland deal since we have lacked a true central European benchmark bond, particularly in the dollar sector of the developing sovereign universe,” said Jeremy Brewin, who helps manage more than $800 million of emerging-market debt at Aviva Investors Ltd. in London and put in orders for the bonds. “For diversification reasons alone this deal makes some sense.”

HSBC Holdings Plc, Barclays Capital and Citigroup Inc. organized the sale, Bloomberg data show.

The cost to protect against a default by Poland fell 2 basis points today to 166.5 basis points, according to credit- default swap prices from CMA Datavision in London. The contracts, which rise as perceptions of credit quality deteriorate, reached a high of 420 basis points in February.

Credit-default swaps, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

-- With reporting by Ewa Krukowska in Warsaw. Editors: Gavin Serkin, Stephen Kirkland

To contact the reporter on this story: Laura Cochrane in London at lcochrane3@bloomberg.net

Last Updated: July 7, 2009 12:27 EDT