Slovenia has avoided bailout, but there is a long way to recovery

The results of the bank stress test released on 12th December have confirmed that the cost of recapitalization for debt-ridden Slovenian banks is higher than originally expected, but the country will manage to cover it without outside help.

After months of deliberations, the bank stress test demanded by the European Commission to assess the health of the Slovenian banking sector was finally performed. It revealed that the government will need €4.8 billion to cover the cost of recapitalizing its battered and, to a large extent, state-owned banking sector.

This 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 continue with the long-delayed reform of its financial sector. As an immediate result of the bank stress test results, the yields on the Slovenian dollar-denominated 10 year bonds maturing in 2022 have fallen to 5.28%, the lowest level since March.

The government will recapitalize three state-owned banks mainly by non-performing loans with €3 billion in cash and bonds, and an additional €441 million will be collected by imposing losses on junior bondholders. Five privately owned banks will be given a period of six months, before June 2014, to raise €1 billion in private markets.

Bostjan Jazbec, governor of the Slovenian Central Bank, warned on 13th December that, despite the good news, a potential bailout could still be a reality should “things really seriously deteriorate in the following months.” The road to recovery will be long and painful. The Slovenian Central Bank is not expecting economic growth before 2015, and as a result of the banking sector recapitalisation, Slovenia’s budget deficit will soar to 7.1% in 2014, and public debt will reach 74% by 2015.

A successful getaway from the recession requires not only reform of the financial sector, but also a complete change of the country’s economic system. Once hailed as an economic beacon among Eastern European countries that entered the European Union in 2004, Slovenia went through a dramatic economic slump when the 2008 Eurozone crisis revealed major flaws in its economy. The weak points stemmed from state ownership and the unhealthy relationship between politics and business. Slovenia has announced plans to privatize a large part of its economy, including 15 state-owned companies that form the backbone of the economic system. Among these are NLB bank, Nova KBM bank, Abanka and Telekom Slovenia.

Officials from the European Central Bank have raised concerns that the lack of outside pressure might lessen the amount of attention the government pays to the economy’s structural problems and allow for a continuation of the crony capitalism that brought the economy to its knees in the first place. We may expect that the entire reform process will be conducted under close scrutiny from Brussels and Frankfurt, and the government in Ljubljana will have little room to manoeuvre.