GOC BOND ISSUANCE PROVES EASY MONEY

UNCLAS ZAGREB 000304 SIPDIS SENSITIVE DEPARTMENT FOR EUR/SCE AND EUR/ERA, TREASURY FOR INTERNATIONAL AFFAIRS ERIC MEYER AND LARRY NORTON E.O. 12958: N/A TAGS: EFIN EINV ECON PGOV HR SUBJECT: GOC BOND ISSUANCE PROVES EASY MONEY ¶1. (U) Seemingly unaffected by recent credit-rating downgrades, the GOC successfully completed its largest ever bond issuance on May 27. Media report that investor interest was "beyond expectations"; the full EUR 750 million was registered in just one day and the issuance was oversubscribed by 65 percent. In a public statement, PM Sanader said the success of the issuance shows the international market has a positive view of Croatia's economic and monetary policy and the prospects of its economy. Hrvoje Radovanic, director of the Debt Management Department at the Ministry of Finance, confirmed for us that investors have been found for the target amount of the issuance, with a better-than-expected interest rate of 6.5 percent. Investors in Austria claimed the largest share with 25 percent, followed by Germany with 19 percent, and Croatia, the U.K., France, and Italy with 7 to 10 percent each. American investors claimed just over 3 percent. In all, about 160 investors from 25 countries registered the bonds. ¶2. (U) The funds will be used to help refinance old debt, cover the current budget deficit and maintain liquidity. Radovanic said the EUR 750 million aligns with current budget needs. He declined to speculate, however, on whether another issuance will be needed later this year, saying it would depend on GDP performance. Analysts outside the government have been less reserved in their speculations, saying the GOC will need another issuance as well as a second budget revision. ¶3. (SBU) COMMENT: While the success of this bond issuance may be a vote of confidence for Croatia from the international financial market, all indicators suggest the GOC will face further financial challenges in 2009. With the Croatian National Bank now forecasting a 4 percent drop in GDP and other analysts expecting a 3.2 to 4.5 percent drop, the budget revision adopted in April seems overly optimistic in assuming just a 2 percent drop in GDP and projecting a resulting deficit of 1.6 percent of GDP. PM Sanader and Minister of Finance Suker have avoided any comment on this overarching concern, however, in touting the success of the bond issuance. When they note this is the GOC's largest ever issuance, they also avoid mentioning the less rosy corollary--that Croatia is now carrying its largest ever foreign debt load. BRADTKE