Slovenia’s Citizens’ List party will join Prime Minister Alenka Bratusek’s government, a move that may help the nation avoid early elections as it struggles with a recession and a banking crisis.
The party’s inclusion, announced by leader Gregor Virant in Ljubljana late yesterday, gives Bratusek, who replaced Janez Jansa in a Feb. 27 parliamentary vote, a majority in the legislature. A confirmation vote on the new government will probably take place next week.
Slovenia, which is grappling with its second recession since 2009 and widening losses at its banks like Nova Ljubljanska Banka d.d., is looking to avoid early elections as it works on measures to spur economic growth and avoid becoming the sixth euro member to require an international bailout.
“There is likely to be a lot of uncertainty as the government won’t have a strong mandate needed to implement wide-ranging reforms,” William Jackson, an emerging-markets economist at Capital Economics Plc in London, said by phone yesterday. “We may see further slippage in fiscal consolidation and delays in support for banks.”
The yield on Slovenia’s dollar-denominated benchmark bond maturing in 2022 rose to 5.3482 percent, the highest this year, on Feb. 27 when Jansa’s Cabinet was ousted. The yield has since dropped and was at 5.0420 percent at 5:17 p.m. yesterday in Ljubljana, according to data compiled by Bloomberg.
Jansa’s administration, which took power in February last year, devised a plan to recapitalize the nation’s banks by swapping their bad loans for state-guaranteed bonds totaling as much as 4 billion euros ($5.2 billion). Lawmakers also confirmed pension changes and a labor market overhaul that are meant to improve the country’s competitiveness.
Bratusek’s new Cabinet, formed by parties that opposed the bad bank plan with a referendum motion that was struck down by the Constitutional Court last year, may slip in the overhaul drive, according to Jackson.
“A delay in reforms and bank support might not be punished by the markets, meaning Slovenia could get away without a bailout, in the near-term anyway,” he said.
Slovenia will probably have to apply for aid at some point to recapitalize its banks, Christoph Weil, an economist at Commerzbank AG in Frankfurt, wrote in a March 6 note to clients. Euro-region finance ministers would approve the aid request in return for a bailout program with tough conditions, he said.
The nation’s two largest banks owned by the state, Nova Ljubljanska Banka and Nova Kreditna Banka Maribor d.d., had a combined loss of 480 million euros in 2012 on surging loan-loss reserves. Abanka Vipa d.d., the third-biggest bank, is struggling to raise fresh capital after two failed attempts.
Slovenia’s economy will shrink the most in the European Union after Greece and Cyprus this year on weakening investment, a rising jobless rate and faltering domestic consumption, the European Commission said in a report last month. The economy is forecast to decline 2 percent this year after gross domestic product shrank 2.3 percent in 2012.
A recovery of 0.7 percent can be expected next year, depending on a “swift” resolution of the banking crisis and a successful restructuring of the over-indebted corporate sector, the EU’s executive arm has said.