Slovenian Economy Probably Contracted in Second Quarter

Slovenia’s economy shrank in the second quarter as exports to Europe eased and consumption faltered after the government’s austerity measures, a survey of economists showed.

Gross domestic product contracted 1.2 percent from a year earlier, compared with a 0.2 percent drop in the first three months, according to the median estimate of six economists in a Bloomberg survey. The statistics office will publish its GDP report at 10:30 a.m. in Ljubljana tomorrow.

“It looks like the Slovenian economy deteriorated in the second quarter,” said William Jackson, an emerging-markets economist at Capital Economics Ltd. in London. “The outlook for the Slovenian economy is pretty grim as exports will continue to struggle against a backdrop of a recession in the euro zone. And the combination of fiscal austerity and fragile banks will hold back domestic demand.”

Economists from London to Warsaw have said Slovenia is on course to seek international assistance as the economy is on the verge of entering its second recession in three years and its lenders rely on the European Central Bank loans for liquidity. Slovenia’s credit rating was cut by Moody’s Investors Service, Fitch Ratings and Standard & Poor’s in early August because of domestic banks’ need for fresh capital. All three rating companies keep a negative outlook on the sovereign.

Yields Climb

Slovenia’s borrowing costs surged above 7 percent earlier this month, a threshold that forced Ireland and Portugal to ask for an international bailout. Slovenia’s bonds maturing in January gained today and the yield fell 34 basis points to 6.78 percent at 2:17 p.m. in Ljubljana. It reached 7.92 percent on Aug. 14, the highest since November, according to data compiled by Bloomberg.

“Government bond yields have been over 7 percent for much of the past few weeks, but for now the government appears to be OK with these borrowing costs,” Jackson said. “For the government to seek help, it would probably require a fresh flare-up in tensions in the euro zone, causing local bond yields to spike and making borrowing prohibitively costly.”

The government of Prime Minister Janez Jansa, which came to power in February after early elections, has denied it will seek assistance from the European Union to prop up its banking industry. The administration is also pushing to implement spending cuts and tax increases to gain investor confidence as the debt crisis that started more than two years ago in Greece continues to roil markets.

Swaps

The cost of insuring government bonds using credit default swaps was at 497 basis points after reaching a record high of 510 basis points on Aug. 15, according data compiled by Bloomberg. Swaps rise as the perception of creditworthiness declines. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Slovenia’s GDP will shrink 2 percent in 2012, according to an estimate by the Organization for Economic Cooperation and Development. That compares with a 1.4 percent contraction forecast by the European Commission and a 0.9 percent drop estimated by the government’s economic institute.

To contact the reporter on this story: Boris Cerni in Ljubljana, Slovenia at bcerni@bloomberg.net

To contact the editor responsible for this story: James Gomez at jagomez@bloomberg.net

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