Jan. 23 (Bloomberg) -- Slovenia is on the brink of early elections amid corruption allegations against Prime Minister Janez Jansa that threaten to sink the government as it fights to avoid an international bailout.
The Citizens List party began meeting at 5 p.m. in the capital, Ljubljana, to decide whether to quit the ruling coalition after the country’s anti-graft agency said the premier failed to declare some private assets. The party’s departure would force the government into minority rule or prompt elections unless it finds a replacement.
Slovenia is looking to avoid becoming the sixth euro-area nation to resort to financial aid after the government devised a 4 billion-euro ($5.33 billion) bank bailout. Jansa’s Cabinet, less than a year in office, is working on an economic overhaul and savings measures to cope with the country’s second recession in three years.
“An early vote would in all likelihood mean a delay in Slovenia’s much-needed reforms, particularly to the banking sector,” William Jackson, an economist at Capital Economics Ltd. said by phone from London. “Without these, it’s difficult to see how Slovenia will escape from recession and will remain vulnerable in the event of a deterioration in the external financing environment, which could lead to renewed fears that a bailout would be needed.”
The country risks a credit-rating downgrade, an increase in risk premium on Slovenian bonds and in the cost of capital in case of snap elections, which would also halt efforts to lead the economy out of the crisis, Jansa said Jan. 11. Moody’s Investors Service rates Slovenia at Baa2, its second-lowest investment grade, while Standard & Poor’s gives it an A rating with a credit-watch negative outlook.
Jansa said today that he warned the coalition partners yesterday of the “consequences of political instability,” the newspaper Vecer reported.
The yield on Slovenia’s 2022 dollar-denominated bond rose 14 basis points to 5.128 percent by 4.54 p.m. in Ljubljana to the highest level since Dec. 19 on a closing basis, according to data compiled by Bloomberg. The benchmark SBITOP index was down for a third consecutive session, sliding 0.7 percent to close at 639.61 in Ljubljana.
The cost of insuring the debt with credit-default swaps rose four basis points to a month high of 251, the third-highest level among countries in emerging Europe tracked by Bloomberg after Ukraine and Hungary. The contracts rise as perceptions of creditworthiness worsen.
Citizens List gave Jansa, who allegedly failed to declare more than 200,000 euros in assets, until midnight yesterday to resign. Finance Minister Janez Sustersic, a member of the party, said yesterday in Brussels that he would step down if the group leaves the coalition. Jansa has said the omission was an accident.
“A coalition break-up would represent a hurdle for the implementation of the proposed bad bank, despite the law already being approved, as key implementation rules have not yet been set up,” Jaromir Sindel, an economist at Citigroup Inc. in Prague, wrote in a note to clients today. “This would be of a particularly negative consequence, if the bad bank becomes the topic of any preelection campaign.”
Sustersic helped passed legislation to create the so-called bad bank that will take non-performing loans from lenders such as Nova Ljubljanska Banka d.d. and Nova Kreditna Banka Maribor. In exchange, the banks would receive government-guaranteed bonds. Lawmakers also passed budgets for this year and next as well as changes to the pension system to ease the burden on public finances.
Slovenian public-sector workers, including teachers, doctors and customs officials are on strike today, to protest against a 5 percent wage cut. About 100,000 people are participating in the industrial action, Branimir Strukelj, president of one of the trade unions, was quoted by the newspaper Finance as saying.
“All the demand for bonds that Slovenia was able to generate in October was built on investors’ trust in the government being willing and able to implement reforms,” Otilia Simkova, an analyst at Eurasia Group in London, said by phone. Failure to implement the changes “would have its impact on investors’ considerations. Slovenia will be approaching markets quite soon so this would be a problem.”
The government may sell as much as 3 billion euros of debt this year to repay maturing credits as yields fall, finance the budget and recapitalize the banking industry, Deputy Finance Minister Dejan Krusec told reporters in Vienna Jan. 15.
Gross domestic product fell 3.3 percent in the third quarter from a year earlier, the third-biggest drop in the euro region after Greece and Portugal, as consumption slumped and exports to Europe eased. GDP is forecast to recover in 2014 to 0.9 percent growth, according to a European Commission report in November.
Croatia’s July entry to the EU as its 28th member may also become a casualty if the turmoil deepens. Slovenian lawmakers have yet to approve the accession of their neighbors because of a banking dispute stemming from the breakup of Yugoslavia. All of the bloc’s members must approve any expansion of the world’s largest trading area.
“I had assumed that Slovenia would not dare to go it alone and be the only EU member state not to have ratified the treaty, thereby delaying Croatian EU accession,” Timothy Ash, chief emerging-markets economist at Standard Bank Plc in London, wrote in a note to clients yesterday. “If the Jansa government collapses, and early elections are called with parliament in recess, it might be technically difficult for Slovenia to ratify the treaty.”
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