Slovenia Bailout Escape Plagued by Communist-Style Lenders

There’s little evidence of Slovenia’s communist past, save for a few statues of former Balkan strongman Josip Broz Tito. And its banking industry.

Once a standout among the former eastern bloc nations that clamored to join the European Union, Slovenia was the first to adopt the euro and is the only ex-Yugoslav member of the 27-nation bloc. It is also the only one that has yet to privatize its largest banks. State lenders have an 80 percent market share, with corporate debt-to-equity ratios among the highest in Europe, according to the International Monetary Fund.

In an echo of Yugoslavia’s hybrid planned economy, Slovenian governments over the past two decades used the banks to finance state projects and companies, with less focus on risk and return. As property and construction bubbles burst, bad debt rose to a fifth of economic output, raising the risk of making the country the euro area’s next bailout casualty.

“Slovenia’s banking crisis has been brewing for years,” Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington, said in an e-mailed response to Bloomberg questions on April 16. “It has privatized less than any other former communist EU member, and this is especially true of the banks.”

While former Soviet satellites from Latvia to Romania sold off state assets, Slovenian governments since the breakup of Yugoslavia chose a gradual approach to economic turnaround. With the highest per-capita economic output among the ex-communist countries, there was little incentive to open the economy to foreign investors and risk causing job losses and social upheaval.

CDS Prices

As Slovenia lurches toward a possible bailout, that policy is coming back to haunt the country of 2.1 million people wedged between the Alps and the Adriatic Sea.

The cost of insuring Slovenian government bonds against non-payment for five years using credit-default swaps jumped 141 basis points since the start of the year through April 16 and was 350 basis points at 4:42 p.m. in Ljubljana.

The IMF in a Dec. 6 report said that Slovenia’s lenders are “highly vulnerable” and may need as much as $1.9 billion in capital to bring the core Tier 1 capital ratio of the industry to 9 percent under a scenario simulating a worsening of the euro-area crisis. At the end of 2011, the six largest banks were at 8.8 percent.

Selloff Pledge

The bulk of bank restructuring must be done before the end of the year, Finance Minister Uros Cufer told Bloomberg in an interview in Washington today. Once the banks are recapitalized, which may cost “close to” 1 billion euros, the process of transferring assets “can start very soon” and possibly be finished in the third quarter, he said.

The government will announce details of its privatization plan, which will include more than two companies, on May 9, he said.

Until now, state banks such as Nova Ljubljanska Banka d.d., Nova Kreditna Banka Maribor d.d. and Abanka Vipa d.d., the country’s three largest, have been used to keep funds flowing where private investors may have stopped them, Cufer’s predecessor Janez Sustersic said.

“The main reason Slovenia didn’t sell its banks is surely because they were servicing the interests of the country’s political and financial elites,” the former finance minister said in an e-mailed response to Bloomberg questions. “Foreign-owned banks behaved much more rationally.”

An April 17 auction of 500 million euros ($652 million) of 18-month Treasury bills, called at the last minute by the Finance Ministry, was oversubscribed by more than double. Most of the bids came from state banks that are even more cash-strapped than the government.

Nova Ljubljanska, headquartered in a communist-era concrete tower in the center of the Slovenian capital, was partially sold off, only to end in failure.

‘Negative Impact’

KBC Group NV, Belgium’s second-biggest financial-services company, bought a 34 percent stake for 435 million euros in 2002. Five years later, the government blocked the its attempt to increase its holding to a majority, prompting then-Chief Executive Officer Andre Bergen to lament about “a missed opportunity.”

In 2012, KBC began to divest, citing a “negative impact” on earnings, returning the last of its stake to the government this year.

Nova Kreditna, which had a 205 million-euro loss in 2012, was one of four banks that failed last year to meet European capital targets set by regulators. Bank of Cyprus Pcl, Cyprus Popular Bank Pcl, known as Laiki Bank, and Italy’s Banca Monte dei Paschi di Siena SpA were the others. Five Slovenian banks were downgraded by Fitch Ratings on April 5.

‘Cheap Money’

While the ratio of non-performing loans in the banking industry was 14.4 percent at the end of last year, up from 11.2 percent at the end of 2011, the figure jumps to 20.5 percent if the three largest banks are counted alone, according to Ljubljana-based Alta Invest.

That’s a result of “cheap money” after Slovenia became a euro member, as well as “loans based on political connections, where economic logic was not included,” Saso Stanovnik and Igor Taljat, analysts at Alta Invest, said in a note.

Fixing the country’s banking system, including the creation of a bad bank to take on problem loans totaling as much as 4 billion euros, is the government’s priority, according to Bratusek, whose administration has been in power less than a month.

Even with the successful Treasury bill auction, Slovenia’s financing needs are “high” at about 2.5 billion euros this year and 4 billion euros to 4.5 billion euros next year, while the banking industry remains “challenging,” Barclays Plc analysts Eldar Vakhitov, Apolline Menut and Andreas Kolbe in London wrote in a note to clients late yesterday.

“Privatization would help address the long-standing governance weaknesses of these banks, which were put into the spotlight by the crisis,” the IMF said in the report. “Reducing government influence on the day-to-day operations and lending decisions of banks will help improve the risk management practices and the efficiency and stability of the banking system over the longer term.”

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