Croatia may turn to IMF as debt grows ‘risky,’ FinMin Linic says

Croatia may seek assistance from the International Monetary Fund as next year’s borrowing needs become “enormous and very risky,” Finance Minister Slavko Linic said.

The European Union’s newest member needs to borrow 44 billion kuna ($7.7 billion) next year to refinance debt and service a budget gap of 16 billion kuna, Linic told Zagreb-based weekly magazine Globus. Government spokeswoman Zinka Bardic confirmed Linic’s statements by phone.

“At a high interest rate of 5 to 7 percent, depending on whether we will borrow at home or abroad, for us this is an enormous and very risky level of debt,” Linic said in an interview. “In cooperation with the IMF, borrowing conditions would be much more favorable. And we will need any help we can get.” He said aid was a “possibility that we cannot dismiss.”

Croatia, whose $63 billion economy hasn’t grown since 2008, has been hobbled by rising interest payments, debt held by state companies, a bloated public sector and unemployment approaching 20 percent. Prime Minister Zoran Milanovic’s 22-month-old government cut its 2013 growth forecast on Sept. 26 to 0.2 percent as the country will fail to benefit from its first year in the world’s largest trading bloc.

The yield on Croatia’s dollar bond maturing in 2023 rose to 5.907 percent at 9:43 a.m. in Zagreb from the previous close of 5.883 percent. Croatia last tapped international markets in March, selling $1.5 billion of 10-year bonds at 5.625 percent.

Croatia’s economy should grow 1.3 percent next year, fueled by state investment, Linic said. That differs from a European Commission forecast made on Tuesday for 0.5 percent growth in 2014 and a contraction of 0.7 percent this year.

The Adriatic nation’s second-quarter budget deficit of 7.2 percent of gross domestic product is the fourth-highest in the bloc, after Greece, Spain and Ireland, according to Bloomberg calculations based on Eurostat data released on Oct. 22. The European Commission estimates a 2014 gap of 6.5 percent of GDP.

The Commission will initiate a report on Croatia’s excessive deficit, triggering the EU’s monitoring system for budget offenders, which applies to economies where the gap exceeds 3 percent of GDP, Olli Rehn, the EU’s commissioner for economic and monetary affairs, said yesterday. Linic said he’d argue against further spending cuts as a way to rein in the deficit.

“Further merciless cuts will be dangerous,” Linic, who’ll present the 2014 budget at a cabinet session next week, told Globus. “You can always find space to cut, but at what price? In the current conditions, that could be very, very risky.”


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