Slovenia’s economy will only recover once banks have added to their capital, Prime Minister Janez Jansa said.
“Only recapitalizing the banking industry can revive the economy,” Jansa told lawmakers in Ljubljana today as he presented details of budget spending for the next two years. “The government should seek to bring next year’s budget deficit within the European Union’s limit of 3 percent of gross domestic product.”
The government is seeking to recapitalize the nation’s largest banks, including Nova Ljubljanska Banka d.d. and Nova Kreditna Banka (KBMR) Maribor d.d., by swapping their bad loans for state-guaranteed bonds that will probably be eligible as collateral for further funding with the European Central Bank, Finance Minister Janez Sustersic has said.
Slovenia is overhauling its economy to make it more competitive by reducing the public sector and changing labor laws as well as pensions to avoid the need for an international bailout. Slovenia raised $2.25 billion last week by selling 10- year bonds at a yield of 5.7 percent, an amount that economists such as Timothy Ash at Standard Bank Plc in London say will cover the nation’s financing needs for next year.
“Slovenia borrowed more cheaply with the U.S. dollar bond sale than would have been the case if we sold them in euros,” Jansa said today.
The country, rated Baa2 at Moody’s Investors Service, two levels above junk, originally sought to raise $1.5 billion, according to Finance Minister Sustersic.
“Last week’s bond issue bought the government valuable time,” Gillian Edgeworth, chief economist for eastern Europe and the Middle East at UniCredit AG in London, wrote in a note to clients today. Whether Slovenia can provide further capital to its banks “in the absence of a thorough independent assessment of its banking sector and official sector funding for the sovereign, will be a function of market risk appetite, developments within the euro region and government efforts to bolster banking sector, fiscal and structural reform.”
Slovenian state-owned banks, hit by a surge in bad loans, were at the center of investor concern the nation may join Portugal and Ireland in seeking a bailout package as its borrowing costs surged to more than 7 percent for most of August.
The benchmark government notes maturing in January 2021 continued to rally with the yield falling 25 basis points to 5.45 percent at 3.29 p.m. in Ljubljana, the lowest level since June 8, according to data compiled by Bloomberg.
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