Slovenia quiet for the moment, but bailout still looms

Alenka Bratusek and Angela Merkel

The Slovenian government won the confidence vote in Parliament, and the successful placing of a €1.5 billion bond issue, granting the Alpine state its moment of relief. However, the potential bailout is still a reality.

Alenka Bratusek’s left-wing coalition government had a successful month. The government won the confidence vote in the Parliament on the 15th November, and at the same time the European Commission endorsed the Slovenian 2014 budget plan in its evaluation of national budgets. Most importantly, the state surprised the markets by placing €1.5 three year Eurobond issue with a private investor.

As a result, the yield on the Slovenian dollar-denominated bonds has fallen to less than 6% for the first time in the past 6 months. This will most certainly give an additional boost to the political stability of the ruling coalition and ease Slovenia’s ability to borrow on international markets. However, it might also relieve the pressure on the government to implement the badly-needed structural reforms and privatization of its part state-owned economy.

With the recent €1.5 billion bond issue, the government has most certainly raised the prospects of successfully covering bank recapitalization costs and meeting its obligations in the coming year. But potential external help is still highly possible. As a result of recapitalization costs, Slovenia’s budget deficit will soar to 7.1% next year and public debt will reach 74% in 2015.

The bank stress test, which is due next month, will reveal the true state of the debt-burdened banking sector and the exact amount needed for its recapitalisation. Current estimates place the cost of recapitalisation at about €4.6 billion, €1.8 billion higher than previously estimated, primarily due to the higher level of non-performing loans (NPL), according to the Fitch group rating agency. The government has set aside €1.2 billion to meet the costs of recapitalization, but it is far from certain that it will be able to cover these costs on its own.

Should the country require external help, it will probably come in the form of a limited programme targeting only the banking sector, similar to the Spanish one, without affecting the government’s economic policy. On the positive side, Slovenian economic fundamentals are relatively healthy, with the budget deficit and public debt within the European average. As a result, most analysts predict that private creditors will not suffer losses from the potential bailout.

The key to the resolution of the Slovenian financial crisis lies primarily in the ability of the state to convince the markets that there is a political will to pursue swift reforms in its public sector and to implement the bank restructuring programme that started in May with the formation of the bad bank. So far, the process is disappointingly slow, and none of the existing €7.9 billion of NPL’s have been transferred to the bad bank. Politics could again be the greatest enemy in the Slovenian fight against recession.

More on the Slovenian banking crisis from GRI:

Slovenian banking crisis is heading towards its peak

Slovenia is Still Standing in Line for a Bailout

Overdue Privatization Looms in Slovenia After Euro-crisis

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Categories: Economics, Europe

Author:Dr. Ante Batovic

Ante is a foreign policy and energy analyst. Previously he was a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a Masters degree in Global Politics from the London School of Economics and a PhD in History from the University of Zadar. He is an experienced researcher interested in foreign policy, political economy and energy.

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  1. Slovenia has avoided bailout, but there is a long way to recovery | Global Risk Insights - December 18, 2013

    […] is pretty much in line with the €4.6 billion estimate made by the Fitch rating agency in early November, and it will allow the Slovenian government to […]

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