Slovenian Bailout Looms as Political Risk Persists, Nomura Says

Slovenia’s new government may be forced to ask for international aid to prop up its banks because of increased political risk, economists at Nomura International Plc said.

Prime Minister Alenka Bratusek’s Cabinet, approved by Parliament yesterday, has signaled “a push onto pro-growth policies and against austerity,” which will slow fiscal consolidation, boost debt and possibly prompt a credit-rating cut, economists Peter Attard Montalto and James Burton in London wrote in a note to clients today.

“Slovenia has a path through the crisis, albeit an extremely risk-laden one,” they said. “The market’s waterfall-like contagion focus and limitations of funding could however combine with political difficulties and downgrades to create a perfect storm and become a self-fulfilling crisis.”

The government pledged to continue with a bank recapitalization plan of as much as 4 billion euros ($5.2 billion), though with unspecified modifications, as surging bad loans at the country’s banks like Nova Ljubljanska Banka d.d. fuel investor concern the Adriatic nation may follow Cyprus, Greece and other peripheral countries to ask for a bailout.

Market Attention

“Slovenia seems to be to the fore” in the market’s attention, Montalto and Burton wrote after contagion fears from Greece, Ireland and Portugal flowed to Cyprus with investors asking who may be next.

Both Slovenia and Cyprus have problems tied to their banks even though banking assets in the Mediterranean island represent about 710 percent of the country’s output compared to Slovenia’s 135 percent to GDP, according to the Banka Slovenije.

“Slovenia has a difficult fiscal balancing act and a very tight funding program path to negotiate,” the economists said.

The former Yugoslav nation needs about 3 billion euros of funding this year with financing requirements due in June, the International Monetary Fund said in a report yesterday. Banks in Slovenia would also need 1 billion euros of fresh capital, the IMF said.

“If we consider that some 7 billion euros of bad debt or at-risk debt has been identified by the central bank,” then the bailout sum is estimated at 4 billion euros, the Nomura economists said. The critical issue is the banks’ tier 1 capital ratio being below the required 10 percent, “hence the need for bailouts is just as great.”

Standard & Poor’s cut Slovenia’s credit rating on Feb. 13 one level to A-, citing the government’s announced support for state-owned banks. Fitch Ratings rates the country an equivalent A-, while Moody’s Investors Service assesses the country at Baa2, its second-lowest investment grade.

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