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. Last Updated: 07/27/2016

Lithuania's Borrowing Costs Increase

VILNIUS, Lithuania -- Lithuania is facing higher borrowing costs at home and abroad due to worries over plans to fund an expensive oil deal that has renewed fears the government is unable to rein in spending, analysts said Tuesday.

Controversy surrounding the deal to sell oil firm Mazheikiu to U.S. energy group Williams is focused mainly on the heavy financing burden the state will have to take on under terms of the sale.

Two key ministers resigned last week - and Prime Minister Rolandas Paksas also seems likely to quit - over a requirement that the cash-strapped government lend $350 million to Mazheikiu to compensate for a working capital shortfall, pushing the fiscal deficit to 9.8 percent of GDP this year and 12 percent in 2000.

"I think this will have an important impact on borrowing costs, especially the turmoil in the Cabinet," said Kristel Richard, an associate at Standard & Poor's.

"We want to see a fiscal correction in the near future. We are going to monitor them very closely," she added.

Lithuania has a low S&P investment grade rating of BBB-.

Parliament this month approved 450 million litas ($112.5 million) worth of cuts to the 1999 budget, although the Finance Ministry had said that twice that amount needed to be slashed from public spending.

The International Monetary Fund wants Lithuania to agree to keep its fiscal deficit under 2 percent of GDP next year before signing a new economic memorandum with the Baltic state.

While Lithuania is not expected to borrow directly from the IMF, an agreement would allow access to about $100 million in World Bank structural adjustment loans and calm foreign investor worries about the currency due to the fiscal imbalance.

Analysts say the government was slow to react to signs that this year's budget had been overly optimistic in the face of the Russian crisis and said it needed to go farther to show it was serious about limiting spending.

"There does need to be a real demonstration that the government is willing to take a great deal of fiscal pain," said Neil Wigan, an analyst with Fitch IBCA in London.

Lithuania has been drawing down its own treasury funds over the past five weeks, as most attempts to refinance domestic debt through T-bill auctions have been undersubscribed. Two auctions held this week failed altogether.

Analysts say there seems to be no good outcome. Without a deal with Williams the fate of Mazheikiu Nafta - a key part of the economy that accounts for 10 percent of GDP - is in doubt. With a deal, the fiscal deficit will soar.