Slovenia Premier Bratusek Defies Markets With No-Aid VowBoris Cerni and Tony Czuczka
Time may be running out for Alenka Bratusek, the Slovenian prime minister who is resisting a bailout as global bond markets put her on the front lines of Europe’s debt crisis.
Less than 18 months ago, she was a novice lawmaker whose government experience was as a civil servant in the former Yugoslav republic’s Finance Ministry. Now Bratusek, 43, stands between Slovenia’s crisis-scarred banks and the euro area’s sixth bailout as investors and international officials ask whether her plan will be enough to avoid outside aid.
Bratusek says time is what she needs to fix the banks -- by deploying a rescue package she opposed before she came to office -- and that her nation won’t need an international rescue. By next month, she promises, her coalition government will begin swapping as much as 4 billion euros ($5.2 billion) in bad bank loans for government-guaranteed debt. After eight weeks in office, investors are questioning whether she can deliver.
“Talk is cheap,” Egon Zakrajsek, a Slovenian-born Federal Reserve economist in Washington, said in an e-mail. Slovenia needs “fundamental economic and social reforms” to restore market confidence and “neither the current government nor any of its predecessors has been able to deliver.” Zakrajsek said he was commenting in a private capacity.
The yield on Slovenia’s dollar-denominated bond maturing in 2022 rose to a record high of 6.38 percent just a week after Bratusek’s cabinet took power, from the lowest ever, 4.51 percent, on Jan. 3. The yield dropped 2 basis points from yesterday and was at 5.41 percent at 10:26 a.m. in Ljubljana, according to data compiled by Bloomberg.
The cost to protect Slovenia’s government debt against default using credit-default swaps declined 2 basis points to 282 basis points, according to data compiled by Bloomberg.
Slovenia’s overhaul drive has “failed to deliver on transparency and thus credibility, consistent with our concerns about implementation risks,” Mai Doan, an emerging-markets economist at Bank of America Merrill Lynch in London said in a note to clients today. The program could “disappoint the European Commission, which would probably prefer more rigorous measures and transparency.”
Opening the door to a bailout would expose Bratusek to the risk of having to impose Greece-like austerity measures in return for aid. Giving European officials and the International Monetary Fund a say in overhauling the economy would also end the practice of politicians using Slovenian banks to fund state projects and companies, Andraz Grahek, a managing partner at Capital Genetics, a financial advisory firm, said in an e-mail.
“The no-bailout mantra is a struggle for power, pure and simple,” and Bratusek “will never call for aid” because that could blow up her four-party coalition government, said Grahek, who is based in Ljubljana, the capital.
Bratusek took office on March 20 after a corruption probe targeted the leaders of the two biggest parties, underscoring the political vacuum that helped push Slovenia’s default risk to a six-month high on April 15. That came after fellow euro member Cyprus accepted a European Union-led rescue that imposed losses on bank depositors and shrank its financial industry.
Faced with investor speculation that Slovenia was next in line for a rescue, Bratusek stood firm even as the cost of insuring against Slovenian default using credit-default swaps rose to 378 basis points in mid-April. Even after the costs declined this month on a successful domestic bond sale, Slovenia remains a bigger default risk than Spain or Italy, according to data compiled by Bloomberg.
The first female prime minister for Slovenia’s 2 million people, Bratusek finds herself in charge of ending the nation’s second recession since 2009 and what the Organization for Economic Cooperation and Development calls a “severe banking crisis.”
Since coming to power, Bratusek has named a finance minister who says Slovenia is “in a comfortable position,” rejected “drastic” cuts in social programs, delayed adopting a national debt cap and seen Moody’s Investors Service cut the Alpine nation’s credit rating to junk on April 30.
Her coalition snubbed outgoing Finance Minister Janez Sustersic, the architect of the bad-bank plan that Bratusek criticized while in opposition and then adopted, saying he had done more harm than good. In came Uros Cufer, previously an executive at Nova Ljubljanska Banka d.d., Slovenia’s state-owned biggest lender. It has posted a loss every year since 2009.
Bratusek was elected to parliament in December 2011 on the Positive Slovenia ticket. She became party head in January when Slovenia’s anti-corruption agency alleged that leader Zoran Jankovic had failed to declare private assets. The same probe felled Janez Jansa, the previous prime minister.
Under pressure from the European Commission, Bratusek has started to get specific. Her government plans to start cleaning up banks’ balance sheets in June, mostly by swapping bad loans for state-guaranteed bonds. The rescue could swell public debt to 71 percent of gross domestic product next year, says Finance Minister Cufer. It was 22 percent in 2008. Banks’ bad loans equal about 19 percent of GDP, the central bank says.
On May 9, Bratusek presented a package of tax increases, spending cuts and plans to sell state-owned enterprises, to address EU concerns. The proposals were praised by German Finance Minister Wolfgang Schaeuble and EU Economic and Monetary Affairs Commissioner Olli Rehn.
The government prepared the overhaul measures “believing that with their successful implementation we will avoid any form of foreign assistance and maintain our independence and responsibility for a better, common future,” Bratusek’s Cabinet said in a response to questions from Bloomberg News.
Still, Slovenian debt’s balance of risk and reward is “unattractive” due to risks that the government won’t carry out promised reforms, Morgan Stanley analysts said in a May 2 note to clients.
Dominant politicians in Bratusek’s government hold dear many of the policies, such as resistance to foreign ownership of Slovenian companies and a “bloated” public sector, that brought the country into its current situation, Zakrajsek said.
Aberdeen Asset Management, with $12 billion in emerging-market debt, isn’t buying Slovenian debt because it’s “expensive compared to the embedded risks,” Viktor Szabo, the Scottish company’s London-based portfolio manager, said in e-mailed comments on May 9.
A soccer fan who likes to attend her school-age son’s games, Bratusek has a master’s degree in social sciences. She dropped plans to become a physiotherapist before going into government, she told news site Siol.net. She headed the Finance Ministry’s state budget unit for six years, including when Slovenia became the first post-communist nation to join the euro in 2007.
“The Prime Minister is relatively young on the Slovenian political scene, but with enough experience,” including her tenure at the Finance Ministry, her Cabinet said today. On domestic and international affairs including EU matters, she is consulting with more experienced colleagues while her short political career “isn’t a plus or a minus” though she “believes the new world can be created only with new faces.”
Bratusek may have to persuade her own public she can defy the markets. Asked whether Slovenia will ultimately need outside aid, 57 percent of respondents agreed and 36 percent said it won’t, according to an April 23-24 poll of 419 people for the Delo newspaper. No margin of error was given.
BlueBay Asset Management Ltd., which oversees $47 billion, is buying more Slovenia bonds on bets that the euro area’s fourth-smallest economy will rebound and central bank liquidity will bring down borrowing costs.
“The market has suffered from domestic political noise and contagion from Cyprus,” Russel Matthews, a money manager at BlueBay in London, said in an e-mail April 24.
Even so, Bratusek may not have much of a grace period.
“Unstable coalitions like the one in Slovenia rarely succeed in fashioning an economic turnaround, particularly if they are based on backward-looking concepts,” the Konrad Adenauer Foundation, the research institute of German Chancellor Angela Merkel’s Christian Democratic Union party, said in a report on April 5.