Slovenia Tapping State Lenders to Avoid Aid as Yields SurgeKrystof Chamonikolas and Boris Cerni
Slovenia, the first post-communist nation to adopt the euro, is relying on state-owned lenders to help refinance early as much as 855 million euros ($1.1 billion) of bills as borrowing costs surge on concern the government may require an international bailout.
Slovenia will offer 500 million euros of 18-month notes tomorrow, the biggest auction in six months, to fund the early buyback of debt due in June, Finance Ministry data show. Yields on Slovenia’s 2022 dollar notes rose 1.28 percentage points the past month to 6.28 percent at 5:09 p.m. in Ljubljana, or 0.86 percentage point more than similar bonds from Hungary, which has a lower credit rating and more debt relative to its economy.
The former Yugoslav republic, which last sold foreign obligations in October, is turning to local investors after the nation’s second recession since 2009 increased non-performing loans and stoked speculation it would follow Cyprus in seeking international aid. The country’s three largest banks are all government-run, and local investors have purchased 79 percent of all bills sold this year, according to the Finance Ministry.
“The auction will probably be successful as state-aided banks are the dominant buyers,” Hrvoje Stojic, chief analyst at the Zagreb-based unit of Hypo Alpen-Adria-Bank International AG, said in a phone interview yesterday. “While this can’t be considered an indication of long-term public-finance stability, Slovenia could possibly return to foreign debt markets this quarter after presenting its budget and bank-overhaul plans.”
Slovenia, which adopted the euro in 2007, sold 12-month notes at a yield of 2.99 percent at its last T-bill auction on April 9, up from 2.02 percent for similar bills on Feb. 12, Finance Ministry data show. The April 2014 securities yielded 3.42 percent yesterday.
With the fourth-smallest economy in the euro area, Slovenia fell into the crossfire after European creditors and the International Monetary Fund forced losses on bank depositors in a 10 billion-euro aid package for Cyprus. While the country is less reliant on banking than the Mediterranean island nation, rising default risk has reignited concern it may follow Greece, Ireland, Portugal, Spain and Cyprus in seeking a bailout.
The cost of insuring Slovenia’s bonds against non-payment has climbed by 146 basis points, or 1.46 percentage point, this year to 376 basis points today, according to credit-default swap data compiled by Bloomberg. That compares with Spain’s swaps trading at 263 and Portugal’s at 400.
Slovenia will need to borrow about 3 billion euros this year to repay maturing debt, aid banks and finance the budget, the IMF said March 20. A total of 1.1 billion euros of debt is due to mature in June, the biggest monthly amount this year, data compiled by Bloomberg show.
A failure to raise the planned amount tomorrow may lift the yield on 2022 dollar notes to 7 percent and prompt Slovenia to seek international aid, said Alessandro Giansanti, a strategist at ING Groep NV. A bailout deal for the country’s banks or a precautionary credit line would lower the yield to 5 percent to 4.5 percent, he said in a phone interview from Amsterdam today.
“We are in a situation where the bond market is almost shut for Slovenia, so the only way for them to get financing from the market is via Treasury bills,” he said.
The average duration of Slovene bonds shortened to 6 years in the first quarter from 6.5 years a year earlier, the least since the final three months of 2009, data compiled by Bloomberg show. The country of 2.1 million people last tapped foreign markets with a $2.25 billion 10-year note in October.
International “money-market funds don’t want to take Slovenian risk at the moment,” Margarete Strasser, who helps manage $670 million in central and east European debt at Pioneer Investments Austria, said by phone from Vienna on April 12. “I can understand why they don’t want to sell longer-dated bonds at this time. Yields are already at a very high level.”
Premier Alenka Bratusek’s four-week-old administration has pledged to press ahead with a bank-recapitalization plan valued at as much as 4 billion euros and to step up austerity measures including tax increases. The rescue is “the No. 1 priority for the government” and the funds needed for the overhaul may come from the sale of state-owned companies, Bratusek said yesterday.
“The situation in the budget is more serious than I thought,” Bratusek said in an interview in Ljubljana. “But we will take measures to improve it.”
Bad loans stemming mostly from the construction industry’s collapse keep rising after reaching 7 billion euros, or 19 percent of gross domestic product, in October 2012, the Paris-based Organization for Economic Cooperation and Development said in an April 9 report. State-controlled Nova Ljubljanska Banka d.d., Nova Kreditna Banka Maribor d.d. and Abanka Vipa d.d., the three largest banks, have been hit the most as the share of non-performing loans to companies rose to 30 percent, the OECD said.
Slovenia’s Finance Ministry doesn’t want to comment on any “individual” auction or on the “future participation of local banks,” in tomorrow’s T-bill sale, the press office said in an e-mail reply to questions yesterday.
“Nova Kreditna Banka expects a successful sale of T-bills with an interest rate that would be interesting to the market,” said Karidia Toure Zagrajsek, a spokeswoman for the country’s second-largest bank. The Maribor-based lender hasn’t decided how much it will buy tomorrow, she said in an e-mail yesterday.
Mojca Strojan, a spokeswoman at Nova Ljubljanska Banka, the country’s largest lender, didn’t reply to calls and an e-mail requesting comment yesterday. Ljubljana-based Abanka didn’t reply to a Bloomberg e-mail sent to its press office yesterday.
Political gridlock and legal hurdles “have prevented Slovenia from addressing its imbalances adequately,” increasing “vulnerability at a time of heightened sovereign funding stress in Europe,” the European Commission, which enforces European Union regulations, said in a report on April 10.
Slovenia has a long-term foreign currency debt rating of Baa2 at Moody’s Investors Service, the second-lowest investment grade. Its public debt at 60 percent of GDP compares with 57 percent in Poland, 79 percent in Hungary and the EU average of 90 percent, according to European Commission estimates for 2013.
Aberdeen Asset Management, with $12 billion in emerging-market debt, is avoiding the nation’s debt, said Viktor Szabo, a London-based portfolio manager. The size of this week’s T-bill sale suggests the country has a “desperate need for funding,” he said in e-mailed comments on April 12.
“We can still find better stories with decent yield within emerging markets, so we don’t have to take the Slovenian risk,” Szabo said. “If it could build a visible political consensus behind a credible fiscal and banking program, it wouldn’t be a bad credit based on its debt metrics.”
Goldman Sachs Group Inc.’s fund management arm is overweight on Slovenia’s bonds and may buy more as it expects the challenges facing the nation won’t force the government into a debt restructuring, Sam Finkelstein, who helps manage $40 billion in emerging-market debt at the New York-based firm, said in a phone interview from London on April 3.
If priced “attractively,” Slovenia will find buyers for its bonds should it return to international markets, said Claudia Calich, a senior portfolio manager for Invesco Advisers Inc., who oversees $3.1 billion in emerging-market debt. “They will have to be coming to the market soon,” she said in an interview in London yesterday.