Slovenia’s chances of avoiding an international bailout increased after a government report showed its ailing banks need less cash to shore up their balance sheets than the government already set aside.
Slovenian banks will need a total recapitalization of 4.78 billion euros ($6.5 billion), compared with the 5 billion euros the government of Prime Minister Alenka Bratusek put aside in a reserve. Yields on the country’s bonds fell to the lowest in 19 months.
The former Yugoslav republic was among the hardest hit in the Balkan region by the global crisis that began in 2008, raising the risk of it becoming the the sixth euro-area member to require outside assistance. The recapitalization plan for eight banks helps banks weighed down by bad loans equal to more than a fifth of economic output and two decades of bad policies, said central bank Governor Bostjan Jazbec.
“The bank recapitalization cost of today is a consequence of all those free lunches at banks that were served in the 20-odd years since Slovenia’s independence,” Jazbec said today at a press conference in Ljubljana.
The dollar-denominated bonds maturing in 2022 extended a three-day rally in Ljubljana after declining for the previous six sessions. The yield plunged 35 basis points, or 0.35 percentage points, from yesterday to 5.37 percent at 3:41 p.m. in Ljubljana, the lowest level since May 25, 2012, data compiled by Bloomberg shows.
“Given these domestic resources and the desire from Berlin to avoid opening new programs unless a sovereign is macro-critical, Slovenia will likely avoid a bailout,” Tsveta Petrova and Mujtaba Rahman, analysts at Eurasia Group, said in an e-mailed note.
The nation’s three largest lenders, Nova Ljubljanska Banka d.d., Nova Kreditna Banka Maribor d.d. and Abanka Vipa d.d. alone need a combined injection of 3 billion euros, leaving a buffer from the reserves chest.
The European Commission also urged the government to begin selling its assets in the three lenders as soon as possible, which Finance Minister Uros Cufer said would only partially reimburse the state for the recapitalization outlay.
The government last month sold 1.5 billion euros of bonds in a private placement, which went to pad the cash reserve before today’s announcement. That boosted investor confidence in the past days.
Local units of Hypo Alpe-Adria Bank International AG, UniCredit Spa and Raiffeisen International AG were also included in the stress test, conducted for the government and central bank by an independent auditor.
Implementation of the recapitalization plan, which needs European Commission approval, may begin in a “couple of days” for the biggest local lenders, Cufer said.
European Union officials said they were satisfied by the results of the stress test and asset review and the steps Slovenia, which adopted the euro in 2007, were taking to avoid a bailout.
“I am confident that the recapitalization of the banking sector, in combination with the implementation of the measures aimed at restructuring the financial as well as the corporate sector, will stabilize Slovenia’s banking sector,” Dutch Finance Minister Jeroen Dijsselbloem said in a statement today. “Stronger banks and an improved business environment will lay the foundation for the economic recovery.”
Dijsselbloem is also the head of the Eurogroup, composed of euro-member finance ministers.
Slovenia used a stricter method of scrutiny than previous checks and similar to what the European Central Bank will apply to assess the health of 130 banks in the currency union next year after previous tests failed to address the weaknesses of the industry.
Bratusek’s government will spend about 3.6 billion euros to recap domestically owned banks and to boost capital at the bad bank, or bank asset management company, Cufer said.
“After the bank recapitalization, Slovenian banks will be among the best capitalized in the euro region,” Jazbec said at at the joint press conference..
With banks grappling with bad assets and remaining reluctant to lend, the export-oriented economy is set to grow again only in 2015, according to the central bank. It sees gross domestic product shrinking an annual 2.6 percent this year and
0.7 percent in 2014.
The European Bank for Reconstruction and Development said it supports “sustained reforms” in Slovenia.
“The Slovenian authorities have reached a milestone in their reform efforts which should lead to reducing the role of the state in the real economy,” said EBRD President Sir Suma Chakrabarti in a statement from London. “The EBRD is ready to support these efforts and is reviewing investment opportunities both in the financial and the corporate sectors.”
Cufer said the government also pledged to step up its overall state asset-sale program, not just in relation to the financial industry, as the country struggles to turn its economy around.