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Lithuania may avoid seeking an international bailout as bond investors in search of yields close to 10 percent return to the Baltic state’s debt market.

The country’s government debt is “very attractive” and “a compelling investment story” compared with its peers in eastern Europe such as Hungary or Romania, said Lutz Roehmeyer, a Berlin-based fund manager at Landesbank Berlin AG who oversees about $15.5 billion in assets.

Lithuania, which pegs its currency to the euro, is suffering the European Union’s deepest recession as it struggles to push through austerity measures to keep its budget in check. Output contracted 22.4 percent last quarter, more than the 19.6 percent slump in neighboring Latvia, which obtained a 7.5 billion euro ($10.8 billion) loan from the International Monetary Fund and European Union in December to avert default.

Roehmeyer said he’s “not very concerned” about Lithuania’s economic decline, as long as the country sticks to its euro adoption strategy, which will “offer a very safe exit for the imbalances.”

A Standard & Poor’s Aug. 10 announcement putting the country’s BBB rating on CreditWatch negative hasn’t changed his view, he said.

“Lithuania is one of the top yielders in eastern Europe and at the same time has a very low debt to GDP ratio; it’s suffering because there’s a Baltic problem,” said Roehmeyer, who has invested 200 million euros in the country’s bonds this year. “I will definitely participate if there’s a second chance” to buy Lithuanian bonds in an auction.

Debt, Deficits

Government debt this year will be 22.6 percent of gross domestic product, compared with 72.6 percent in the EU on average, according to the European Commission. Lithuania’s budget deficit will widen to 5.4 percent of GDP this year and 8 percent in 2010. The country targets a gap within the EU’s 3 percent limit by 2011.

The government plans to sell euro-denominated bonds “after August,” Finance Minister Ingrida Simonyte said in a July 16 interview, to increase its 2014 bond issuance. The country sold 500 million euros in five-year bonds yielding 9.375 percent on June 15, with investors offering to buy 1.5 times as much as was offered.

The auction was a success even as neighboring Latvia struggled to quell speculation it would be forced to devalue the lats and abandon the pre-euro exchange rate mechanism, a move that would have destabilized the region.

Funding Needs

Lithuania will need about 3.5 billion litai ($1.45 billion) of additional funding this year, said Jekaterina Rojaka, a Vilnius-based economist with DnB Nord AB. The Finance Ministry is unlikely to pay more than 10 percent in the sale later this year to keep a lid on debt in a recession, Rojaka said 500 fast cash.

“The reaction in the market would be extremely positive now at this moment,” Maurizio Gialdini, a Genoa-based fund manager with Carige Asset Management SGR, said in an Aug. 3 interview. “In the last days there has been, and still is, a great demand for high yielding paper. That could be a great moment to issue.”

Gialdini, who holds about 3 million euros in Lithuanian assets, said he “would definitely consider” the nation’s new bond.

The Baltic nation is joining emerging-market governments from Brazil to South Africa that have sold debt overseas this year as signs of recovery boost investor demand for higher- yielding assets. Governments of emerging markets have sold $38.5 billion of debt this year, according to estimates by Yarkin Cebeci, an economist at JP Morgan’s in Istanbul.

Yield Search

“The 2014 bond performed very well after issuance, that’s why I expect that there will be no problem to increase this bond,” Roehmeyer said. “Investors will buy it because now risk-aversion is away, liquidity is in the market, and people are still looking for yields. Now at a yield of 8 percent it’s very interesting to invest in Lithuania.”

President Dalia Grybauskaite said on July 30 the country won’t ask for international aid as long as the markets are willing to lend money to the government.

The possibility of an international bailout may be a plus, and represents an insurance against default, Roehmeyer said.

“Lithuania still has a chance to go to the IMF and get the international community to help,” Roehmeyer said. “The EU will not let Lithuania fall.”

Lithuania priced its bonds to yield 258 basis points more than Hungarian government debt with a similar-maturity sold on July 17. A basis point is 0.01 percentage point.

‘Painful Adjustment’

The cost of protecting Lithuania’s debt using credit- default swaps has more than halved since February from a peak of about 850, according to Bloomberg data. Credit default swaps on Lithuania fell 9.5 basis points and traded 380 at 10:30 a.m. in London today, according to CMA DataVision.

Standard & Poor’s gives Lithuania’s long-term foreign debt the second-lowest investment grade, while Moody’s gives the country the fourth-lowest investment grade of A3.

The country is suffering a “painful adjustment,” the IMF said in an annual review on Aug. 11, adding government finances have come under considerable strain. Even so, the country’s banking system is “well-capitalized” and the economy’s recovery will take hold in 2011, and the fund said.

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Filed under: business by Finance Boss