Slovenia should sell state-owned banks with debtholders taking some of the losses to avoid a “severe” crisis, the Organization of Economic Cooperation and Development said.
The Alpine nation, hit hard by a boom-bust cycle and the euro area’s debt woes, should recapitalize “distressed,” viable banks with the state refraining from keeping a blocking minority shareholding and wind down non-viable institutions, the Paris-based OECD said in a report today.
Slovenian state-owned banks Nova Ljubljanska d.d. and Nova Kreditna Maribor d.d., burdened by rising bad loans and relying on financing from the European Central Bank, are at the center of investors’ worry the nation may be the sixth euro-area member to ask for a bailout. Cyprus inflicted unprecedented losses on uninsured depositors and senior bondholders as part of the 10 billion-euro ($13 billion) rescue plan last month.
“Slovenia is facing a severe banking crisis, driven by excessive risk taking, weak corporate governance of state-owned banks and insufficiently effective supervision tools,” the OECD said. “To reduce the fiscal costs of bank resolutions, holders of subordinated debt and lower-ranked hybrid capital instruments should absorb losses.”
Credit-default swaps on Slovenia, which accounts for 0.4 percent of the euro economy, have surpassed those for Spain, Italy and Croatia. The latter was approved to be the 28th member of the European Union last week.
Slovenian swaps rose to within 40 basis points of Portugal’s, the smallest difference in three years and compared with a 114 basis-point gap on March 15. Swaps on Portugal are trading at 426 basis points, Croatia at 308, Italy at 277 and Spain at 273.
The yield on Slovenia’s dollar-denominated bonds maturing in 2022 jumped to a record 6.31 percent on March 27 from 4.98 percent, approaching levels that prompted bailouts of other euro nations. The yield was 5.57 percent today.
Worries that Slovenia will fail to implement a 4 billion-euro plan to prop up banks and lose access to financing abroad are raising borrowing costs as the government looks to tap bond markets, though Finance Minister Uros Cufer said April 3 he’s in no rush.
Slovenia’s three largest banks, Nova Ljubljanska, Nova Kreditna and Abanka Vipa d.d., may need as much as 2 billion euros of fresh capital, Fitch Ratings said April 5, when it cut the assessment of five Slovenian banks and affirmed the ratings of two banks with a negative outlook.
The unwinding of the economic boom has led to a “high proportion” of non-performing loans that reached 14 percent of total credit in October and is set to rise amid a recession, according to the OECD report. The situation is “particularly worrying” in the non-financial corporate sector, where bad loans reached 24 percent of the portfolio.
“Limited equity markets and the backlog in the privatization program are hindering foreign direct investment, whose increase would help smooth corporate deleveraging,” the group of the world’s wealthiest countries said in the report. “An agreement on a list of public assets to be privatized or managed by a new sovereign holding is still lacking.”
While the government has engaged in “an ambitious fiscal adjustment plan” the budget deficit rose “significantly” during the current economic downturn and restoring public finances has proved “difficult,” contributing to tensions in the sovereign bond market, the OECD said.
“With no policy changes,” public debt could double to exceed 100 percent of gross domestic product, including the expected costs of aging and rescuing banks, the OECD said.
“The prospects for the economy are weak and worse than in many other OECD countries, with annual GDP set to contract significantly in 2013,” according to the report, which forecast GDP to contract 2.1 percent this year before a return to growth of 1.1 percent in 2014.