Croatia to Borrow More Than Expected on U.S. Market, Linic Says

Junk-rated Croatia will borrow more than $1.5 billion on the U.S. market at yields that may top 6.5 percent to finance its budget without help from the International Monetary Fund, Finance Minister Slavko Linic said.

Prime Minister Zoran Milanovic’s government is facing lower than expected growth this year and a widening fiscal deficit in 2014. It unveiled sweeping plans last week to cut costs, raise taxes, and tap European Union funds even as Croatia’s borrowing costs rise toward levels that caused some euro-area countries to consider seeking international bailouts.

Hobbled by four years of contraction or stagnation, Croatia is weighed down by rising interest payments, state company debts and higher salaries and pension payouts. It will start a roadshow in the U.S. in November to find buyers for a bond that Linic said would be “much bigger than $1.5 billion.”

“We would be happy with a 6 to 6.5 percent yield,” Linic told Croatia radio today. “It depends on the market, but it could also be higher.”

The cost to insure debt against non-payment for five years with credit-default swaps rose to a three-week high of 341 at 2:52 p.m. in Zagreb, from its last close of 330. The yield on Croatia’s dollar bond maturing in 2023 rose to 6.030 percent, from the previous close at 5.987. Croatia last tapped international markets in March, selling $1.5 billion of 10-year bonds at 5.625 percent.

Limited Time

The government said last week it would see few benefits from EU entry in July of this year and cut its 2013 growth forecast to 0.2 percent from 0.7 percent. That compares with a May European Commission estimate of 1 percent growth.

Milanovic’s cabinet expects lower growth to help push the budget deficit wider to 5.5 percent of gross domestic product next year, from 3.5 percent this year. With 2 billion euros ($2.7 billion) in debt maturing by next April, Zagreb may have limited time to prove to investors that it is buckling down on its public finances, said Abbas Ameli-Renani, an emerging market strategist at Royal Bank of Scotland Group Plc.

“A U.S. dollar bond issue of greater than $1.5 billion will certainly add supply pressure to the sovereign’s international debt,” Ameli-Renani said by e-mail. “A sizable debt issue would make sense, however, in the context that financing conditions could be materially worse next year.”

Fitch Ratings cut Croatia to below investment grade on Sept. 20, following earlier moves by Standard & Poor’s and Moody’s Investors Service.

IMF Unnecessary

Linic said Croatia will need to issue another bond on the domestic market in the near future, without giving details.

The cabinet will try to reduce the size of next year’s fiscal shortfall by the time the 2014 budget draft is ready and all its efforts are focused on reviving growth, creating jobs and maximizing EU entry benefits, he said.

He added that Croatia was not, at this point, considering asking for international aid.

“A frequent question here is, should we turn to the International Monetary Fund for help,” Linic said. “When the world says this is enough, we don’t believe you are able to service your obligations any more, then we will turn to the IMF, but that moment hasn’t arrived yet.”

Croatia has a chance to stabilize the situation and push down its borrowing costs, said Hrvoje Stojic, chief analyst at the Croatian unit of Hypo-Alpe-Adria-Bank International AG.

“Should Croatia reshape its budget plans, which is expected in November, this will probably increase its credibility, and in turn would push down the yield on Croatian debt,” Stojic said by phone.

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