Slovenia Votes In Cabinet as It Seeks to Avert Cyprus’s Fate

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Slovenian lawmakers approved a new government that pledged to implement a plan to fix the ailing banking industry to avoid requesting an international bailout like Cyprus.

Prime Minister Alenka Bratusek’s coalition holds 47 seats in the 90-member Parliament, which voted 52-35 today in Ljubljana to confirm the new Cabinet, according to a live report by public broadcaster TV Slovenija. Bratusek said her Cabinet will work to shore up the financial system by extending a 4 billion-euro ($5.2 billion) bank recapitalization plan devised by the previous administration of Janez Jansa.

The Adriatic nation’s banks, such as Nova Ljubljanska Banka d.d., are struggling with surging bad loans that equaled a fifth of economic output, fueling investors’ concern that Slovenia may join Cyprus, Greece, Portugal, Ireland and Spain in asking for financial assistance. Jansa was ousted in a parliamentary vote last month.

“While the new Cabinet wants to recapitalize banks and consolidate public finances, it’s unclear just how they will do that,” Igor Masten, an economics professor at Ljubljana Economics University, said by e-mail.

The yield on Slovenia’s dollar-denominated bond maturing in 2022 rose to 5.3482 percent, the highest this year, when Jansa’s Cabinet was ousted on Feb. 27. Yield on the notes dropped 1 basis point to 5.337 percent at 8:13 p.m. in Ljubljana, according to data compiled by Bloomberg.

Bank Woes

Nova Ljubljanska, the nation’s biggest lender, reported a loss of 275 million euros in 2012, its fourth consecutive negative result. Nova Kreditna Banka Maribor d.d., which had a 205 million-euro loss last year, fell to the lowest level since its 2007 listing after a debt-equity swap increased the government’s stake to 79 percent. The shares plunged almost 20 percent yesterday and continued to slide today, dropping 9.6 percent to close at 91 cents in Ljubljana.

Slovenia’s export-driven economy is grappling with its second recession since 2009. Gross domestic product contracted 2.3 percent last year and is forecast to shrink 2 percent this year, the European Commission said in a report last month. GDP may recover in 2014, pending a solution to the bank industry woes, the EU’s executive arm has said.

“The bank recapitalization plan is an urgent matter and we will continue with the existing plan with some changes,” Bratusek told lawmakers during the debate before the vote. “We need to fix banks so that they will be able to contribute to the economic recovery.”

Cypriot Woes

Finance chiefs from the 17 euro countries on March 17 told Cyprus to raise 5.8 billion euros from bank depositors to unlock emergency loans. The island nation’s lawmakers rejected the plan yesterday, throwing the rescue package into limbo. Banks in Cyprus will remain closed though March 25 at least.

While its economic woes may be similar, Slovenia is not in a comparable situation to Cyprus, where government and EU officials proposed a tax on bank deposits to pay for the bailout, Banka Slovenije said March 18. Total assets at Slovenian lenders represent 135 percent of the nation’s GDP while in Cyprus that level is at 800 percent, it said.

Winning Confidence

“The obvious concerns when looking at Slovenia is that there are risks it’s the next candidate for a bailout if politicians don’t pull their fingers out and put a comprehensive reform program in place to win the confidence of the market,” Timothy Ash, an emerging-markets economist at Standard Bank Plc in London, wrote in a March 18 note.

Uros Cufer, the finance minister-designate, pledged yesterday to continue with the recapitalization of the nation’s banks even though the plan won’t solve all of the country’s problems.

Slovenia was plunged into political uncertainty in January after the anti-corruption agency accused Jansa of failing to declare some private assets.

If Bratusek’s government had failed to win today’s vote, the first post-communist nation to adopt the euro would have had to hold its second early ballot in 18 months.

“It’s quite possible the government will last for a while since it wasn’t formed on an economic program, but rather on a common front against Jansa,” Masten said.

Standard and Poor’s cut Slovenia’s credit rating on Feb. 13 one level to A-, on par with Poland and Malaysia, citing the government’s announced support for state-owned banks, which will lead to a higher debt ratio than previously forecast.