Slovenia’s bonds gained for a third day after the government’s $3.5 billion international debt sale eased concern that the Adriatic nation will be forced to ask for a bailout.
The yields on the government’s dollar notes due 2022 tumbled 18 basis points from yesterday to 5.37 percent, the lowest since March 20, bringing the two-day drop to 35 basis points. The government yesterday sold $2.5 billion of 10-year bonds at 6 percent and $1 billion of five-year bonds at 4.95 percent.
Slovenia, mired in its second recession since 2009 amid Europe’s debt crisis, is working to rescue its troubled banks and avert an international bailout. While the nation’s “significant economic challenges” are manageable if “decisive action” is taken, the country must outline its plan, the European Union’s Economic and Monetary Affairs Commissioner Olli Rehn said today.
“There is no stress with refinancing now, so it’s time to act,” Jaromir Sindel, an economist at Citigroup Inc. in Prague, wrote in an e-mailed note.
Slovenia’s three biggest banks, Nova Ljubljanska Banka d.d., Nova Kreditna Banka Maribor d.d. and Abanka Vipa d.d., are all state-owned or controlled and make up almost 50 percent of the financial system. The government’s rescue plan, which should be presented to the European Commission by May 9, includes a 900 million-euro ($1.2 billion) capital boost and the creation of a so-called bad bank to cleanse lenders’ balance sheets.
The bond sale is “an important step to create conditions to carry out targets set out in the government’s program,” Finance Minister Uros Cufer said today in an e-mailed statement.
The proceeds from the sale “should ease near-term concerns on the country’s finances as well as concerns about an imminent bailout being necessary,” Jens Larsen, chief European economist at RBC Capital Markets in London, and Norbert Aul, European rates strategist at RBC, wrote today in an e-mailed note.
Still, the need for an international rescue remains a danger as the recession will stretch into next year because of weak domestic demand, the European Commission said in its spring forecasts, published today.
Gross domestic product will contract 2 percent in 2013 and 0.1 percent in 2014 as rising unemployment affects private consumption, the commission predicted. This year’s budget gap will widen to 5.3 percent of GDP, narrowing to 4.9 percent in 2014, according to the commission.
Slovenia meeting its deficit targets “now seems out of reach,” and EU authorities may consider giving the nation more time to bring the shortfall within its 3 percent of GDP limit, Rehn told a news conference today in Brussels.
The Finance Ministry postponed its dollar bond sale April 30, shortly before Moody’s Investors Service cut the nation’s credit rating to junk. Moody’s lowered the grade two levels and gave it a negative outlook, signaling it may further reduce the ranking.
The cost of insuring Slovenian government bonds against non-payment for five years using credit-default swaps fell 2 basis points to 281 today after declining 16 basis points yesterday, according to London prices. That compares with 114 for Turkey and 276 for Croatia, also rated Ba1 by Moody’s.
Standard & Poor’s and Fitch Ratings both rate Slovenia four steps higher at A-, with Fitch’s assessment carrying a negative outlook.
“Fitch continues to monitor the implementation by the government of an effective strategy to stabilize the banking sector, as well as fiscal and economic performance,” Fitch said today in a statement after assigning an A- rating to the new dollar bonds. “Failure to tackle issues in the financial sector in a timely manner would increase pressure on the rating.”
Proceeds from the bond sale will be used to pay for the recapitalization of the state-owned banks as well as advance funding for some of the government’s 2014 and 2015 borrowing needs, S&P said yesterday in a report after rating the new bonds A-.