Slovenia to Test Debt Appetite as Financing Pressure Mounts

Slovenia’s government failed to raise 100 million euros ($131 million) at a debt sale this week. Now it’s shooting for five times that amount next week.

With bond yields approaching levels that prompted bailouts of other euro nations, the government will offer 500 million euros of 18-month Treasury bills on April 17. The International Monetary Fund estimates Slovenia will need to borrow about 3 billion euros this year to repay maturing debt, aid banks and finance the budget.

The debt sale will test the willingness of investors abroad to finance Slovenia’s economy as a banking crisis strains the budget, government bonds plunge and soaring default risk threaten to make the country the euro region’s sixth bailout recipient after Cyprus last month. The largest local lenders are state owned and struggling with rising bad debt.

“Unless we see strong non-resident participation, this will be an orchestrated Pyrrhic victory, increasing pressure on Slovenia and thereby raising its chances to lose the international market access,” Andraz Grahek, a partner at Capital Genetics in Ljubljana, said by phone yesterday. “This would expedite an application for some kind of support.”

Slovenia, whose 35 billion-euro economy is the fourth smallest in the euro area, fell into the crossfire after European creditors and the IMF forced losses on bank depositors in a 10 billion-euro aid package for Cyprus.

Selling, Buying

The government on April 9 sold 56 million euros of six-month and one-year Treasury bills, falling short of its target and reigniting concern that it will need international assistance. It’s seeking to buy back early as much as 855 million euros of 18-month notes due June 6, the Finance Ministry said in statement on its website yesterday.

The cost of protecting Slovenian debt against non-payment using credit-default swaps rose to a six-month high of 370 points yesterday, according to data compiled by Bloomberg. It dropped 2 basis points to 368 at 4:06 p.m. in Ljubljana.

The yield on Slovenia’s dollar-denominated benchmark bond maturing in 2022 is hovering close to record levels after the Finance Ministry missed its target in this week’s auction of Treasury bills by almost half as borrowing costs rose. The 2022 bond’s yield was at 6.12 percent at 4:07 p.m., compared with an all-time high of 6.38 percent reached on March 27.

Mounting Pressure

The decision to tap financial markets comes in the face of mounting pressure to solve the nation’s banking woes and avert a fiscal crisis after the European Union gave a stern warning on April 10 that action is needed.

While Slovenia is less reliant on banking than the Cypriot economy, rising default risk has reignited concern it may follow Greece, Ireland, Portugal, Spain and Cyprus in seeking an international bailout.

Slovenia won’t be discussed today at a meeting of euro-region finance ministers in Dublin, Jeroen Dijsselbloem, Dutch finance minister and the Eurogroup chief, told reporters today.

“Slovenia has primarily a banking sector problem, but also a poor track record on reforms and fiscal adjustment, together with a new and weak government,” Laurence Boone and Mai Doan, analysts at Bank of America/Merill Lynch, wrote in a report today from London. “There is a risk that Slovenia’s debt sustainability may soon be endangered if the banking issue is not tackled and reforms are delayed.”

Rising NPLs

The country’s second recession in four years is swelling non-performing loans at state-owned lenders such as Nova Ljubljanska Banka d.d. Bad credit stemming mostly from the construction industry’s collapse represents a fifth of gross domestic product, according to an April 9 report released by the Paris-based Organization for Economic Cooperation and Development.

The government will submit to lawmakers within two weeks a list of state-held companies be sold to private investors, Prime Minister Alenka Bratusek told reporters in Ljubljana today. A “stability program” will also be sent to the European Union by May 9 to lay out how a crisis will be averted, she said.

The government had already pledged to press on with a recapitalization plan valued at as much as 4 billion euros and to extend fiscal-consolidation measures such as tax increases and a revised 2013 budget plan.

Privatization Process

“We will start the privatization process of one or two bigger companies immediately,” Alenka Bratusek said. “My wish is that we privatize one of the banks as well.” She didn’t say which bank.

The success of the debt offering may lie in those local institutions and probably reflects a desire to avoid international markets, which are “now reticent toward small countries with banking problems” in the aftermath of the Cyprus bailout, James Howat, an economist at Capital Economics Ltd. in London, said by e-mail yesterday.

Political gridlock and legal snags “have prevented Slovenia from addressing its imbalances adequately and enhancing its adjustment capacity, thus increasing its vulnerability at a time of heightened sovereign funding stress in Europe,” the European Commission, which enforces EU regulations, said in an April 10 report.

‘Serious’ Situation

The situation is “serious” and it’s up to the government to “give very clear signals” to avoid a bailout, Banka Slovenije Governor Marko Kranjec, who’s also a member of the European Central Bank’s Governing Council, said yesterday in Dublin, according to Market News International.

The commission gave Slovenia and Spain until May 29 to deliver on ways to address their issues or risk becoming the first to be punished under a year-old “macroeconomic imbalances procedure” designed to deal with the lagging competitiveness and overstretched banking systems that are fueling the crisis.

With the government pledging to do “everything in its power” to avoid the bailout, Bratusek is pushing leaders of the main political parties to come up with a constitutional amendment that would put a limit on state debt.

“The decision to tap the market next week suggests a certain confidence on the government’s part -- or a bit of arm twisting on the state-owned banks, perhaps?” Howat said. “That said, a failure to raise the target amount again will rattle investors.”

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