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Slovenia’s Economy Shrank as Exports, Consumption Ease

Slovenia’s economy shrank more than analysts expected in the second quarter as exports to Europe slowed and investments and consumption faltered after the government’s austerity measures.

Gross domestic product contracted 3.2 percent from a year earlier, compared with a 0.2 percent drop in the first three months, the statistics office in Ljubljana said on its website. A survey of six economists forecast a 1.2 percent drop.

“A combination of a credit crunch due to non-functioning banks and government measures to stabilize the budget started to show their effect,” Andraz Grahek, an independent financial adviser and a former fund manager at KD Funds LLC in Ljubljana. “Anyone expecting a notable rebound in the second half will be disappointed because measures to stabilize the banking sector are yet to be implemented, the budget consolidation will continue for some time and exports will stay under pressure.”

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 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.

Bond Yields

Slovenia’s borrowing costs surged above 7 percent earlier this month, a threshold that forced Ireland and Portugal to ask for an international bailout. The yield on the government notes maturing in January 2021 fell 29 basis points today, or 0.29 percentage points, to 6.80 percent at 12:17 p.m. in Ljubljana, 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,” William Jackson, an emerging-markets economist at Capital Economics Ltd. in London, said yesterday. “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.

The cost of insuring government bonds using credit default swaps dropped 9 basis points from yesterday to 488 basis points today after reaching a record high of 510 basis points on Aug. 15, according data compiled by Bloomberg.

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