Slovenia is rushing to tap financial markets in the face of mounting pressure to solve the nation’s banking woes and avert a fiscal crisis after the European Union’s sternest warning yet that action is needed.
The Finance Ministry will sell 500 million euros ($656 million) of 18-month Treasury bills on April 17 after raising 56 million euros on April 9, short of the 100 million-euro target. The announcement came as lawmakers in the capital Ljubljana begin debate today on a plan to place a legal limit on debt. Prime Minister Alenka Bratusek failed to reach a consensus with party leaders on a plan last night.
Slovenia’s ailing banks have made it a target for financial markets, with shrinking demand at a debt auction this week signaling investor expectations that the country may be the next domino to fall in the 17-nation euro area. Cyprus became the region’s fifth bailout victim last month when it agreed to a 10 billion-euro rescue.
“It’s time to act in order to break a current devastating cycle,” Saso Stanovnik and Matej Simnic, economists at Alta Invest d.d. in Ljubljana, wrote in a report today. “It’s the new government’s turn to regain confidence by proposing its own scheme to salvage Slovenia, but it has to be concrete and credible and since time for refinancing is short, it also has to be efficient and quickly implemented.”
Slovenia, whose 35 billion-euro economy is the fourth smallest in the euro area, fell into the crossfire after European creditors and the International Monetary Fund forced losses on bank depositors in the aid package for Cyprus.
The country’s second recession in four years is swelling bad loans at state-owned lenders such as Nova Ljubljanska Banka d.d. Bad loans stemming mostly from the construction industry’s collapse, represent a fifth of gross domestic product, according to an April 9 report released by the Paris-based Organization for Economic Cooperation and Development.
While Slovenia is less reliant on banking than the Cypriot economy, default risk jumped after the Alpine country missed its target at the April 9 debt offering, reigniting concern it may follow Greece, Ireland, Portugal, Spain and Cyprus in seeking an international bailout.
Next week’s “auction will act as another litmus test for the locals’ appetite to lend to the government,” Abbas Ameli- Renani, an emerging-markets strategist at Royal Bank of Scotland Group Plc in London, said in an e-mail. “A successful debt sale will relieve some pressure from the government heading into June, while another failed auction will undoubtedly rattle nerves further.”
The cost of protecting Slovenia debt against non-payment using credit-default swaps rose to a six-month high of 370 points by 3:11 p.m. in Ljubljana, according to data compiled by Bloomberg.
The yield on Slovenia’s dollar-denominated benchmark bond maturing in 2022 is hovering near record levels after the Finance Ministry missed its target in this week’s auction of Treasury bills by almost half as borrowing costs rose. The 2022 bond’s yield stood at 6.21 percent today, near the record-high of 6.38 percent reached on March 27.
Political gridlock and legal snags “have prevented Slovenia from addressing its imbalances adequately and enhancing its adjustment capacity, thus increasing its vulnerability at a time of heightened sovereign funding stress in Europe,” the European Commission, which enforces EU regulations, said in a report yesterday.
The commission gave Slovenia and Spain until May 29 to make reforms or risk becoming the first to be punished under a year- old “macroeconomic imbalances procedure” designed to deal with the lagging competitiveness and overstretched banking systems that are fueling the crisis.
With the government pledging to do “everything in its power” to avoid the bailout, Bratusek has huddled with leaders of the main political parties to come up with a constitutional amendment that would put a limit on state debt. The Cabinet is also working on a bank-recapitalization plan valued at as much as 4 billion euros.
Leaders of parliamentary parties will present their stance on putting the debt limit into the constitution at today’s parliamentary session. Lawmakers will continue the debate and possibly vote on the move on May 7, Karmen Uglesic, the spokeswoman for the assembly in Ljubljana said by phone.
Slovenia’s debt to economic output ratio stood at 53.7 percent at the end of last year, according to the commission.
Slovenia’s three largest banks, Nova Ljubljanska, Nova Kreditna Banka Maribor d.d. and Abanka Vipa d.d., will probably need as much as 2 billion euros of fresh capital, Fitch Ratings said on April 5 after it cut the credit score of some of the country’s lenders.
Slovenia needs to borrow about 3 billion euros this year to repay maturing debt, aid banks and finance the budget, the said on March 20. About 1 billion euros of debt matures in June, according to data compiled by Bloomberg.
“The problem is not quite as bad as for Cyprus, because the banking sector is much smaller,” Wolfgang Kuhn, head of euro-area fixed income at Aberdeen Asset Management in London, said in an interview yesterday. Still, “we need to have more clarity on the banking sector to venture there.”
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