Bloomberg News

Slovenian Austerity After Cyprus Fails to Stem Yield Gain

March 28, 2013

Slovenia’s pledge to continue austerity measures failed to stem a rise in bond yields to record highs as investors worry the Alpine nation will follow Cyprus as the next euro-region member requiring a bailout.

Prime Minister Alenka Bratusek, in her first major policy speech since taking office, told Parliament yesterday that her week-old government would rebuild ailing banks and improve state finances that are in “bad shape” so the country won’t become the sixth euro member to need aid.

European Union officials are striving to contain a debt crisis that prompted Cyprus to join Greece, Portugal, Ireland and Spain in agreeing on a bailout. Bratusek’s lack of specifics on how to avoid foreign support helped push the country’s benchmark dollar-denominated bonds to an all-time high at a time when Slovenia is looking to tap bond markets.

“Developments in Cyprus have translated into concerns that Slovenia will struggle to access the Eurobond market over the coming months as it moves to recapitalize its banking sector and shift reliance for budget financing away from the domestic banking sector, with an increased risk of a haircut in deposits,” Gillian Edgeworth, chief economist at UniCredit SpA (UCG) in London, wrote in a note to clients yesterday.

The yield on Slovenia’s dollar-denominated bonds maturing in 2022 rose to a record 6.382 percent yesterday before dropping 33 basis points today to 6.05 percent by 5:20 p.m. in Ljubljana, data compiled by Bloomberg show. The cost of protecting Slovenian bonds with credit-default swaps surged 93 basis points to 411, according to data compiled by Bloomberg.

Different Circumstances

Smaller euro countries such as Malta and Slovenia have been quick to distance themselves from the banking crisis that forced Cyprus to accept a 10 billion-euro bailout ($12.8 billion) emergency-aid accord with the EU and the International Monetary Fund on March 25.

Slovenia isn’t in a position to ask for international assistance, central bank Governor Marko Kranjec said in an interview with STA newswire today. Kranjec, who’s also a member of the governing council of the European Central Bank, called on the government to continue with fiscal consolidation and the sale of state assets to help avert a crisis, according to STA.

Economic Woes

Slovenia’s economy has struggled with two recessions over the past four years, boosting bankruptcies. Banks such as Nova Ljubljanska Banka d.d. are struggling with surging bad loans after the collapse of the construction industry, which fueled growth before the crisis. Bad loans account for about a fifth of economic output.

The country needs about 3 billion euros of funding this year, while banks need an additional 1 billion euros of fresh capital, the Washington-based IMF said last week. The previous government of Janez Jansa, which fell Feb. 27 amid a corruption scandal, had proposed a 4 billion-euro plan to deal with bad assets at financial institutions that Bratusek pledged to follow with some unspecified changes.

Invalid Comparison

“Slovenia won’t need aid, we can do this on our own,” Bratusek said yesterday. “Our banking system is stable and safe and comparisons with Cyprus aren’t valid. Deposits here are safe and the government is guaranteeing them.”

Bratusek’s words were of little comfort to the market, which wants to see concrete details on how the government will fix the bank industry and when, said Abbas Ameli-Renani, an emerging-markets strategist at Royal Bank of Scotland Group Plc in London.

Citizens too appear to have little confidence in the government or the banking industry. One in three Slovenians trust Bratusek’s Cabinet, while one in five have faith in the nation’s banks according to a survey conducted by RM Plus. The survey was carried among 700 people between March 22-25 with a 3.5 percent margin of error and published in the Maribor-based Vecer newspaper today.

“Slovenia has its problems, and if the euro zone had not completely messed up the Cyprus bailout, it could have got through under its own steam,” added Timothy Ash, chief emerging-markets economist at Standard Bank Plc in London. “Now though, all bets are off and it seems increasingly likely that a bailout will be required.”

Banking Losses

State-owned Nova Ljubljanska, Slovenia’s biggest lender, reported a loss of 275 million euros in 2012, its fourth- consecutive negative result. The bank needed 381 million euros last year, with Slovenia and its agencies providing all of the money after its second-largest owner, KBC Groep NV (KBC), withdrew from the transaction because it failed to win EU approval.

Nova Kreditna Banka Maribor d.d., which had a 205 million- euro loss last year, was one of four banks that failed last year to meet the European capital targets set by banking regulators. Bank of Cyprus Pcl, Cyprus Popular Bank Pcl, known as Laiki Bank, and Italy’s Banca Monte dei Paschi di Siena SpA (BMPS) were the other three. Laiki was closed as part of the island nation’s bailout.

Nova Kreditna shares fell more than 40 percent last week and dropped again today 8.6 percent to close at 75 euro cents in Ljubljana.

Moody’s Investors Service on March 25 cut Nova Kreditna Banka’s long-term deposit rating two levels to Caa2 from B3, with a negative outlook, on a weakened credit profile and the need for additional capital.

Bond Plans

The government plans to tap international markets to help its finances “depending on market sentiment” and “in line with the program of financing with instruments foreseen in the program,” the Finance Ministry said yesterday in a response to e-mailed questions from Bloomberg News. It gave no details.

“Time is not on Slovenia’s side as shown by the rising bond yields,” Ameli-Renani said by phone yesterday. “The government hasn’t been specific on how they will proceed with the bank plan and fiscal consolidation, they need to clearly spell it out. Some investors have been spooked by developments in Cyprus and will be biased toward applying a harsh treatment to Slovenia given its underlying banking-sector problems.”

Slovenia, rated A- at S&P, last tapped the U.S. debt market in October with a $2.25 billion bond sale. It considered selling more dollar-denominated debt in January, according to former Deputy Finance Minister Dejan Krusec.

To contact the reporters on this story: Boris Cerni in Ljubljana at bcerni@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net; Balazs Penz at bpenz@bloomberg.net


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