Slovenia’s New Cabinet Under Pressure to Avoid Cyprus FateBoris Cerni and Agnes Lovasz
Slovenia’s six-day-old government is being urged to prevent the nation becoming the euro region’s next bailout battleground.
Prime Minister Alenka Bratusek’s Cabinet must quickly carry out a plan to revamp the country’s ailing lenders, the central bank said yesterday. The former Yugoslav nation needs about 3 billion euros ($3.9 billion) of funding this year, while banks need 1 billion euros of fresh capital, the International Monetary Fund said last week.
European Union officials are striving to contain a debt crisis that prompted Cyprus to join Greece, Portugal, Ireland and Spain in agreeing on a bailout. Slovenian banks such as Nova Ljubljanska Banka d.d. are struggling with surging bad loans that equal a fifth of economic output, fueling investor concern that it may be next to seek aid.
“If the government starts implementing the plan, in the end they can avoid going to the EU for a bailout,” Lutz Roehmeyer, a fund manager at Landesbank Berlin Investment, who oversees 10 billion euros in assets including Slovenian government and corporate bonds, said yesterday by phone. “If they don’t move and do nothing, I think we’ll have the next crisis in Slovenia in a few months.”
Concern that Slovenia’s banking woes will trigger a bailout request boosted the yield on the country’s benchmark dollar-denominated bonds, which mature in 2022. The yield rose to 5.538 percent at 4:43 p.m. in Ljubljana, data compiled by Bloomberg show.
The cost to insure the bonds against non-payment for five years with credit-default swaps rose 9 basis points, or 0.09 percentage point, today to 278, the highest in more than three months. The contracts, which decline as perceptions of creditworthiness improve, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower renege on its debt agreements.
Moody’s Investors Service cut Nova Kreditna Banka Maribor d.d.’s long-term deposit rating two levels to Caa2 from B3, with a negative outlook, on a weakened credit profile and the need for additional capital, the ratings company said yesterday.
With the European Central Bank threatening to cut off emergency financing for Cyprus’s tottering banks, Cypriot leaders agreed yesterday to shut the country’s second-largest lender, Cyprus Popular Bank Plc, also known as Laiki Bank, as part of a 10 billion-euro emergency aid accord with the EU and the Washington-based IMF.
The Cyprus aid package isn’t a model for future accords and Slovenia should “manage the situation” because “reforms are under way,” European Central Bank Governing Council member Ewald Nowotny told reporters in Prague today.
Bratusek met with President Borut Pahor yesterday to appraise him of the situation and pledged that Slovenia would avoid a similar crisis “on its own” in what she called “a crucial year,” according to an e-mailed statement from the government.
“Solving the situation in the banking system must be a priority,” the central bank, based in the capital, Ljubljana, said in a response to e-mailed questions from Bloomberg News.
Slovenian and Hungarian banks are the most vulnerable in the region with non-performing loans at about 20 percent and growing, analysts at Standard & Poor’s Ratings Services, led by Paris-based Pierre Gautier, wrote yesterday in a research note.
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, 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 more than 40 percent last week and were up 3.8 percent today at 82 euro cents in Ljubljana.
The government vowed to stick with a bank-recapitalization plan of as much as 4 billion euros, though with unspecified modifications, as surging bad loans fuel investor concern that the country may require a rescue.
Nova Ljubljanska needed 381 million euros last year, with Slovenia and its agencies providing all of the money, after its second-largest owner, KBC Groep NV, withdrew from the transaction because it failed to win approval from the European Commission.
Cyprus “is by far a different situation than you have in Slovenia,” Erste Group Bank AG Chief Risk Officer Gernot Mittendorfer told Bloomberg while attending a financial conference in Prague today. Slovenia’s “banking system and the problem in the banking system is, relatively in terms of size, much smaller than the problem in Cyprus.”
Slovenia, rated A- at S&P, last tapped the U.S. debt market in October with a $2.25 billion bond sale. It considered selling more dollar-denominated debt in January, according to former Deputy Finance Minister Dejan Krusec. The plan was scrapped after a political crisis erupted with corruption allegations against then-Premier Janez Jansa, whose government was ousted Feb. 27.
Roehmeyer said he holds Slovenian government bonds and debt of Slovene Export Corp., or SID bank. Landesbank Berlin Investment isn’t adding to those positions “because we see no progress on reforms and we’re not selling because we think that the yields are high enough to justify keeping these bonds in the portfolio,” he said.
Slovenia adopted the euro at the start of 2007, becoming the first post-Communist European nation to make the switch. Pumping out exports such as household appliances from Gorenje d.d., the small open economy outperformed that of Europe’s common currency area for most of the past decade.
A debt crisis that has swept the continent since 2008 damped demand for consumer goods, pushing the economy into two recessions over the past four years. Gross domestic product shrank 3 percent from a year earlier in the fourth quarter, its third consecutive contraction.
Compounding the issue, Slovenia’s advantage of low debt has eroded with the financial crisis. The debt to GDP ratio will rise to about 60 percent this year and 70 percent in 2014 from about 30 percent in 2008, Timothy Ash, chief emerging-markets economist at Standard Bank Plc in London, said yesterday in a note to investors.
Having entered the crisis with low government debt, Slovenia and can survive without “drastic action,” according to Lazlo Belgrado, a money manager who helps oversee about $20 billion in fixed-income assets at KBC Asset Management SA in Luxembourg.
Still, contagion from a worsening of Europe’s crisis could put Slovenia under market pressure because it’s a “rather small economy,” he said.
“It’s not too big to fail and it has some of the same problems that Cyprus has,” Belgrado said. “The economy got a bit over-leveraged in the boom before Lehman. And the banks are now wrestling with a bad credit problem.”