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By Tsvetelia Tsolova

SOFIA, Jan 11 (Reuters) - Bulgaria plans to sell a smaller amount in government bonds this year than it did in 2010, betting that an economic recovery will boost tax revenue and ease its financing needs, a deputy finance minister told Reuters on Tuesday.

Boryana Pencheva, in charge of government debt management, said the Balkan country is targeting a debt to gross domestic product ratio of about 18.2 percent this year, up from 14.6 percent at the end of 2010 but among the lowest in the European Union.

"The economy started to grow in the second quarter of last year, which coupled with fiscal stability gave us grounds for a more optimistic fiscal framework for 2011," Pencheva said in an interview.

"That is why we think we will need less funds for financing," she said.

Bulgaria, the EU's poorest country, has pegged its lev currency to the euro in a regime which significantly curtails discretion over monetary policy, leaving fiscal policy as its main tool to influence the economy. A large fiscal deficit can put a strain on the currency peg.

It posted a budget shortfall of 3.9 percent of GDP in 2010, beating its 4.6 percent target due to austerity cuts, and expects to be one of the few EU members to have a shortfall below the bloc's 3 percent target ceiling this year.

Pencheva said better-than-planned fiscal results for last year, expected economic growth of 3.6 percent and tight spending will head off the need to seek urgent financing abroad and will cut bond issuance at home this year.

The ministry plans to issue about 1.0 billion levs ($662 million) in treasury paper on local markets this year, Pencheva said, down from 1.5 billion in 2010, when the economy started to emerge from a deep recession.

It issued a 25-million lev, 6-month bill on Monday. Pencheva said the issue was three times oversubscribed and had a yield of 1.38 percent.

"This is a sign for bringing down the yields on government papers as a whole. For the first time we have less than one percent spread over the benchmark German bonds. It is a sign of investor confidence," she said.


Encouraged by signs of economic recovery --GDP growth of 0.7 percent on a quarterly basis in the third quarter -- the ministry cancelled a 5-year, 30-million euro-denominated bond tender planned for late January.

"We expect good revenues in the next few months, so we do not need to issue debt just for debt's sake in that complicated, volatile situation," she said.

Bulgaria may yet tap international markets this year, but Pencheva said the country would only issue a Eurobond of up to 1.0 billion euros if it deemed it necessary and if market conditions were favourable.

"The forecasts for both revenue and spending look good, so that gives us reason to be absolutely calm and focus on the risk-price ratio and not on financing at any price."

"I can say that such a need is unlikely to occur in the first quarter."

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