Slovenia Needs to Buoy Confidence to Avoid Bailout: UBS

Slovenia needs to bolster the confidence of market investors in the Alpine country to raise enough cash to repay debts, plug budget holes and cover the cost of bank restructuring, a UBS economist said.

The month-old government of Prime Minister Alenka Bratusek is facing “three key challenges,” including “patchy access to financial markets” and high borrowing costs at a time when Slovenia needs cash to boost the capital of state-owned banks and narrow the deficit, UBS AG economist Gyorgy Kovacs said in a note to investors today from London. The “poor economic outlook and elevated budget deficits” will drive public debt toward 70 percent of GDP, he said.

“It is absolutely essential to restore and maintain market confidence if Slovenia wants to avoid a bailout,” Kovacs wrote. “The key trigger for an ESM bailout would be the drying-up of market access at reasonable rates. This could be due to domestic reasons — e.g. the government’s inability to progress with its desired fiscal and banking measures — or general risk aversion.”

Bratusek promised a plan to narrow the budget shortfall and fix the banks within a month, a timeframe agreed to with European leaders in Brussels. The government will also prepare the sale of two state-held companies and possibly also a bank.

Slovenia’s economy is expected to grow 1.5 percent in 2014 after a 2 percent economic contraction this year and a 2.3 percent decline in the previous year, according to the International Monetary Fund’s World Economic Outlook.

The slow recovery after a two-year recession “should generate further weakness in the banks’ asset quality as firms are likely to face difficulties,” Kovacs said.

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