Yields on Croatia’s bonds surged to an almost three-month high after a ratings downgrade that spurred Prime Minister Zoran Milanovic to say the government won’t seek a loan from the International Monetary Fund.
The yield on dollar-denominated notes due in March 2021 jumped 21 basis points, or 0.23 percentage point, to 4.746 percent, the highest level since Oct. 1, at 4:25 p.m. in the capital Zagreb. The kuna declined 0.1 percent to 7.5335 per euro, the weakest since Dec. 6, according to data compiled by Bloomberg.
The Adriatic Sea nation had its long-term credit rating cut to BB+, the highest non-investment level, at Standard and Poor’s on Dec. 14. The company said Croatia’s structural and fiscal overhaul is insufficient to promote growth and make government finances more sustainable. Croatia can “do it alone” without outside help, Milanovic said on Nova TV late yesterday.
“An IMF program would provide a key anchor for the market,” Timothy Ash, head of emerging-market research at Standard Bank Group Ltd. in London, said in e-mailed response to questions. “I don’t see why the government is so eager to rule it out.”
Croatia’s Crobex stock index declined 2.3 percent at 4:26 p.m. in Zagreb to 1,680.55, the lowest since Sept. 6. Shares of INA Industrija Nafte d.d. closed at 3.835 kuna per share, 4.1 percent down from the previous close, while shares of T-Hrvatski Telekom d.d., a unit of Deutsche Telekom AG (DTE), fell 1.7 percent to close at 196 kuna per share, the lowest since June 19.
Central bank Governor Boris Vujcic said yesterday that Croatia should continue to borrow both abroad and domestically, adding there is no need for the release of foreign-currency reserves to aid borrowing.
Public debt, estimated at 172 billion kuna ($30 billion) at the end of June, will increase to 55 percent of gross domestic product next year, while state borrowing will total 27 billion kuna, according to government figures. The government is expected to sell about $2.5 billion of debt in January on the U.S. and European markets, with a second round later in 2013 on Asian markets.
The cost to protect against the risk of non-payment on Croatia’s bonds for five years with credit default swaps rose 25 basis points to 282, the highest since Oct. 11, according to data compiled by Bloomberg.
The swaps, which fall as perceptions of creditworthiness improve, 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.
Croatia is struggling to return to growth after the economy shrank in four consecutive quarters. The government on Nov. 19 said the budget deficit will widen as the Cabinet repays debt and begins contributing to EU coffers after its entry in July 2013. It also cut the 2012 GDP forecast to a 1.1 percent contraction, citing an investment drought due to Europe’s debt crisis.
“Structural and fiscal reforms implemented so far have been insufficient to foster economic growth and place public finances on a more sustainable path,” S&P said in the statement.
The downgrade puts Croatia’s credit rating on par with Romania and Indonesia. Fitch Ratings on Nov. 29 lowered its outlook for the former Yugoslav republic’s debt, which it rates at the lowest investment grade, to negative from stable. Moody’s Investors Services on Nov. 19 confirmed an equivalent Baa3 credit rating, with a negative outlook.
“A country with a liquid banking system and neutral current account with limited repayments in 2013 can perfectly cope on its own even after the downgrade,” Petr Grishin, a senior credit analyst at VTB Capital, said in an e-mailed response to questions. “Croatia’s problems are structural, not cyclical.”
The 11-month-old Cabinet of Prime Minister Zoran Milanovic, which has vowed to reduce public spending and remove obstacles to investment to speed up the sale of state companies, predicts the budget deficit will widen to 3.1 percent of GDP next year, while the economy will grow 1.8 percent.
Unemployment in the country of 4.2 million reached 19.6 percent in October, while there were no reductions in the public sector, which employs about 17 percent of the workforce.
The economy will contract 2 percent this year and stagnate in 2013, recovering gradually to trend growth of 2 percent by 2015, according to S&P.