Slovenian lawmakers probably will approve the creation of a sovereign-wealth fund and pass legislation on bank stability as the former Yugoslav republic intensifies efforts to avoid an international rescue.
Lawmakers gather in Parliament today to approve creation of a wealth fund designed to manage assets valued at more than 10 billion euros ($12.8 billion). They will also vote on a plan to exchange as much as 4 billion euros of state-backed bonds for banks’ non-performing loans, while banks would get an additional capital boost of as much as 1 billion euros from the government, according to Finance Minister Janez Sustersic.
“The sums envisaged could be sufficient to stabilize the banking system,” Gunter Deuber, head of central and eastern European research at Raiffeisen Bank International AG, said. “However, I would doubt these amounts, if needed, can be easily financed by the government. Slovenia is currently missing the investor base.”
Prime Minister Janez Jansa’s government, which is working on stabilizing state-owned banks and enacting overhauls of the pension system and labor market, dropped a previous plan for the wealth fund to assume bad loans from lenders. Instead, an agency, known as a “bad bank,” would swap state-guaranteed bonds for non-performing loans from banks such as Nova Ljubljanska Banka d.d. and Nova Kreditna Banka Maribor d.d.
Slovenia must recapitalize its banks and overhaul the labor market and pension system to avoid seeking a bailout, central bank Governor Marko Kranjec said on Sept. 17. Economists from London to Warsaw have said Slovenia is on course to ask for an international assistance package to prop up its lenders.
The opposition Social democrats are threatening to block legislation on the wealth fund and may even call a referendum to block the move, according to lawmaker Janko Veber.
“This is a fire sale, the last wave of privatization,” Veber said in Parliament on Sept. 26. “People should decide if they want these assets to be sold, which would endanger 100,000 jobs.”
Slovenian voters rejected pension changes in a referendum in June 2011, marking a start of an increase in its borrowing costs that led to the September fall of the government of the then-Prime Minister Borut Pahor.
Ratings company Standard & Poor’s warned of “political risks to the implementation of an economic overhaul,” when it cut Slovenia’s credit score last month to A from A+. Moody’s Investors Service also cut the rating to Baa2, the second-lowest investment grade, while Fitch Ratings cut it to A-.
“If it isn’t passed, it could raise the risk that the markets start to believe that the political will isn’t there for a decisive response to Slovenia’s current problems,” said William Jackson, an emerging-markets economist at Capital Economics Ltd. in London, in an e-mailed response to Bloomberg questions.
Slovenia was the first ex-Yugoslav nation to join the European Union in 2004 and the first post-communist country to adopt the euro in 2007. Its borrowing costs on the benchmark bond maturing in 2021 surged to over 7 percent last month on domestic woes and concern the debt crisis that started in Greece three years ago may force it out the credit markets.
Government bonds maturing in January 2021 rallied today, pushing the yield 50 basis points lower to 6.27 percent at 12:37 p.m. in Ljubljana, according to data compiled by Bloomberg. A basis point is a hundredth of a percentage point.
Slovenia plans to sell its first U.S. dollar-denominated debt, a $1.5 billion, 10-year issue, by December, Sustersic said in an interview on Sept. 2. The Adriatic country hasn’t sold any benchmark bonds this year after canceling a debt sale in April.
Slovenia’s debt more than doubled since its euro adoption. It was at 47.6 percent of gross domestic product last year and will climb to just below 55 percent by year-end and to 58 percent in 2013, according to a May report by the European Commission.
“Bank recapitalization with public funds aggravates the task of turning around public-debt dynamics, which eventually could prove a challenge, even in Slovenia, where public debt is still at relatively low levels,” Thomas Harjes, an economist at Barclays Plc in Frankfurt, wrote in a Sept. 21 report. Public debt to unsustainable levels could make necessary a “bank liability management exercise and/or external aid.”