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Slovenia’s Fate Rests With Spain as Bonds Punished

Slovenian Minister of Finance Janez Sustersic
Nova Ljubljanska has about 1.5 billion euros of loans that will probably never be repaid, Finance Minister Janez Sustersic said on July 12, while bad loans at Slovenian banks advanced to more than 6 billion euros in April, the government’s economic institute said July 11. Photographer: Jure Makovec/AFP/Getty Images

Spain may hold the key to Slovenia needing a bailout for its banks, as contagion from the region’s fourth-largest economy threatens to engulf one of its smallest.

Yields on Slovenia’s nine-year bonds are rising and falling almost in parallel with Spain’s, and topped 7 percent last week as investors added to bets that Europe’s debt turmoil may lock both nations out of the market. While borrowing costs in Belgium, Austria and France have dropped to records, Slovenia’s have surged on concern that it will have to channel funds to its banks as bad loans climb.

“Whether Slovenia has to take a bailout or not is really out of their control,” said William Jackson, an economist at Capital Economics in London. “Slovenia is a small economy and it is very susceptible to risk aversion.”

Yields on Slovenia’s 4.375 percent bond, maturing in January 2021 surpassed 6 percent every day in the past month and closed above 7 percent on seven trading days, approaching levels that prompted bailouts for Greece, Ireland and Portugal. The benchmark borrowing cost is now about 6.57 percent, after reaching 7.37 percent on July 9, the most since January.

As Slovenia’s bond yields advance, rates on top-rated euro-region government securities are declining amid speculation that global growth is slowing and that Europe’s debt crisis is deepening. Ten-year French yields dropped to a record 2.03 percent last week. Spain’s five- and 10-year yields climbed to euro-era records today, while the 10-year yield premium to German debt reached the highest ever, after El Pais said six regions may ask the central government for financial assistance.

Yield Premiums

Investors currently charge Slovenia 571 basis points more than Germany to borrow for nine years, compared with a 528 basis-point premium to bunds paid by Italy and 143 basis points for Belgium. Slovenia pays about 84 basis points less than Spain to borrow for nine years.

“Slovenia should be priced in between Italy and Belgium somewhere, but they are trading higher because of contagion,” said Peter de Coensel, who helps oversee 13.2 billion euros ($16.1 billion) at Petercam SA in Brussels. “I think for a buy and hold investor that believes the euro-region will stay intact, they might be a good investment. Otherwise they are very volatile.”

As well as battling market turmoil, Slovenia, which adopted the euro in 2007, is assessing how to cover the liabilities of its financial industry. Banks, including Nova Ljubljanska Banka d.d. and Nova Kreditna Banka Maribor d.d., are struggling with a surge in bad loans as more companies file for bankruptcy.

Funding Needs

Nova Ljubljanska has about 1.5 billion euros of loans that will probably never be repaid, Finance Minister Janez Sustersic said on July 12, while bad loans at Slovenian banks advanced to more than 6 billion euros in April, the government’s economic institute said July 11.

Capital Economics, founded by former adviser to the U.K. Treasury Roger Bootle, estimates the nation may need as much as 5 billion euros in external funding for its banks, compared with its annual gross domestic product of 35 billion euros

“Slovenia has been on the cusp of a bailout for a long time,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “To some extent it hinges on what happens to the banks, and to some extent on what happens elsewhere.”

Spending Cuts

Slovenia “isn’t in danger of seeking help,” Finance Minister Janez Sustersic said last month. The European Commission, the EU’s executive arm, said July 16 the country “hasn’t sought financial aid and isn’t expected to do so,” according to the commission spokesman Simon O’Connor.

The government in Ljubljana, led by Prime Minister Janez Jansa, has adopted measures, including public-sector wage and social benefit cuts this year to reduce spending by about 800 million euros to trim the budget deficit after it reached 6.4 percent of gross domestic product in 2011.

Slovenia’s export-dependent economy is teetering on the brink of a second recession in three years. The economy grew 0.2 percent in the first quarter from the previous three months, when it contracted 0.7 percent, according to the statistics data. GDP is forecast to shrink 1.4 percent this year, the European Commission estimates while the Organization for Economic Cooperation and Development foresees a 2 percent contraction.

Worth Owning

The nation’s debt will be 55 percent of its gross domestic product next year, according to European Commission forecasts published in May. That compares with 81 percent in Spain, 124 percent in Italy and 161 percent in Greece, the forecasts show.

“Slovenia in our opinion does not have the deep structural problems that some of the peripheral countries do,” said Bernhard Matthes, a fund manager at Bank fuer Kirche und Caritas eG in Paderborn, Germany, who holds Slovenian government bonds, but declined to say which ones. “The Slovenian risk is definitely there, but doesn’t justify the price. If we do see a deterioration, then we’ll reconsider our positions.”

While European leaders said last month that they may let their rescue fund lend directly to banks and the European Central Bank cut interest rates to a record low to stem the crisis, risks remain, including a possible delay in Germany approving the rescue fund and a downturn in growth, Monument’s Ostwald said.

“If things get really tough in the euro-zone, Slovenia could face a sudden stop of financing and wouldn’t be able to use all its tools to fix the banks,” said Andraz Grahek, an independent financial adviser and a former fund manager at KD Funds LLC in Ljubljana. “The contagion effect is already here and we are stuck with it for a while.”

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