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VILNIUS - Lithuania may have to raise the level of its public debt to repay depositors of Bankas Snoras, exacerbating an increase in financing costs caused by Europe’s sovereign-debt crisis, reports Bloomberg. The state may need one billion euros next year to make up for funds used to clean up after the collapse of Snoras, Lithuania’s fifth-largest bank by assets, said DnB Bank economist Jekaterina Rojaka.
State debt may surge to 40 percent of economic output, from 33.3 percent at the end of October at an “unfavorable time” as the crisis roils financial markets, she said.
“The pressure in the near-term is very strong because the government will be left with no reserves to refinance maturing debt,” Rojaka said.
Lithuania, which experienced the world’s second-deepest recession in 2009 after Latvia, aims to cut the budget deficit to 2.8 percent of gross domestic product next year, from 9.5 percent in 2009, as it looks to switch to the euro in 2014.
The premium investors demand to hold Lithuania’s ten-year bond, instead of U.S. Treasuries, rose to 473 basis points (4.73 percent) on Nov. 28, the highest on record. The yield fell 0.22 of a percentage point on Dec. 5, to 6.27 percent.
The government may need to raise its borrowing ceiling from 9.5 billion litas (2.7 billion euros) for next year because the funds that were initially allocated to refinance a maturing one billion-euro bond in May will now be lent to the country’s insurance facility to compensate depositors, Finance Minister Ingrida Simonyte said on the Lietuvos Rytas television channel on Nov. 27.
Officials may have to dip into international reserves, which total 19.4 billion litas, as the country faces debt and interest payments of 7.4 billion litas in 2012.
International markets may “punish” Lithuania if the government fails to agree on additional budget measures to keep the 2012 deficit target, Kubilius said in a radio interview with Ziniu Radijas on Dec. 4. The government needs to save an additional 800 million litas in the budget next year, he said.
The Lithuanian government took over Snoras on Nov. 17 after the central bank discovered that assets reported on the bank’s balance sheet were missing. Vilnius District Court has accepted the application regarding the initiation of bankruptcy proceedings against Snoras bank.
According to the law, the court must take a decision on this issue no later than within 15 days from the date of submission of the application. The Bank of Lithuania delivered application on Snoras bankruptcy on Monday.