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Fitch Cuts Croatia’s Outlook to Negative on Wider Deficit

Nov. 29 (Bloomberg) -- Croatia’s credit-rating outlook was lowered to negative from stable by Fitch Ratings, which cited the government’s forecast for a wider budget deficit next year.

Fitch also affirmed the country’s long-term foreign and local-currency issuer default ratings at BBB- and BBB, respectively, it said in an e-mailed statement today. The negative outlook suggests that the company is more likely to cut the debt grade than to raise it or to keep it unchanged. BBB- is three levels below investment grade.

Croatia, which is set to become the European Union’s 28th member in July 2013, is struggling to fend off a renewed recession. The government on Nov. 19 said the budget deficit will widen as the Cabinet repays debt and begins contributing to EU coffers after entry in July. It also cut the 2012 forecast to a 1.1 percent contraction, citing an investment drought due to Europe’s sovereign debt crisis.

The new budget “contradicts the medium-term fiscal strategy and also calls into question the credibility of the brand-new Fiscal Responsibility Law,” Fitch said.

Fitch on Sept. 5 raised Croatia’s outlook to stable from negative, citing the government’s progress in cutting costs and narrowing the budget deficit.

‘Strange Move’

The yield on the bond maturing in 2017 rose to 3.700 percent at 4:03 p.m. in Zagreb from 3.690 percent yesterday, according to mid-pricing data compiled by Bloomberg.

“Very strange move,” said Timothy Ash, the head of emerging-market research at Standard Bank Group Ltd. in London, “for a small increase in the deficit. Croatia’s big problem is growth or the lack of it.”

Finance Minister Slavko Linic, who agreed with the outlook downgrade, said the cut shouldn’affect bond prices “very much.”

“One thing I’d like to add is that we can’t have a successful fiscal consolidation without investment and growth,” he said .

The September upgrade came after a negative outlook “for a long time,” and reflects new concerns, said Zdeslav Santic, the chief economist at Societe Generale SA’s Croatian unit, Splitska Banka d.d.

“Circumstances have changed,” said Santic. “It will also cast doubt on the application of the Fiscal Responsibility Law”.

IMF Outlook

The International Monetary Fund on Nov. 13 said Croatia’s economy will shrink 1.5 percent this year, urging the government to remove barriers to investment and employment in order to return to growth in 2013. The European Commission said on Nov. 7 the economy will contract 1.9 percent in 2012.

Croatia is rated an equivalent Baa3 at Moody’s, the lowest investment grade, level with Latvia and Romania. It is rated BBB- by Standard & Poor’s.

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years.

The rates moved in the opposite direction 47 percent of the time for Moody’s and for Standard & Poor’s. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

Related News and Information:

For Croatian ratings news: TNI CROAT ANA <GO> To See the Statement: NSN M9VJ6K3PWT1C <GO> Link to Company News: 40425Z CZ <Equity> CN <GO> For Eastern European Economic News: {TNI EEU ECO <G0>}

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

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