Slovenia Endorses Debt Ceiling as Cyprus Contagion Wanes

Slovenian lawmakers endorsed a cap on public spending to restore credibility and convince investors and the European Union that the nation can pull itself out of the financial hole it faces.

Legislators in the capital, Ljubljana, voted 78-8 to pass constitutional amendments adding a debt ceiling starting 2015, parliament spokeswoman Karmen Uglesic said by phone today. Lawmakers also voted 86-1 to limit the scope of referendums, according to a live broadcast by TV Slovenija.

“When I was sworn in as premier, I vowed to work for the benefit of the country,” Prime Minister Alenka Bratusek said before the vote. “What we are doing today, it’s for our own sake, not because of Brussels.” The government will adopt legislation accompanying the debt limit to outline the details, she said.

Slovenia, struggling with a banking crisis and its second recession since 2009, is pushing forward with an economic overhaul including a 900 million-euro ($1.2 billion) bank recapitalization plan that seeks to reassure markets the country can avoid outside assistance.

The yield on the country’s dollar bonds maturing in 2022 dropped to 5.49 percent at 5:34 p.m. in Ljubljana from 5.51 percent yesterday, the highest level in more than three weeks, according to data compiled by Bloomberg.

Constitutional Cap

The measures send a “strong signal of Slovenia’s commitment to sound public finances, which are an essential foundation for sustainable growth and job creation in the country,” Simon O’Connor, spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn said in an e-mailed statement today.

Slovenian leaders haggled over the debt for months as the euro member was pushed to the fore of the European debt crisis in March after the bailout of Cyprus.

The contagion from the island nation’s rescue is receding and deposit withdrawals from banks in Slovenia have stabilized, central bank Governor Marko Kranjec said today.

“It’s possible to avoid a bailout if politicians do everything in their power to implement structural reforms,” Kranjec, who’s also a member of the governing council of the European Central Bank, said today at a business forum in Rovinj, Croatia.

The government is on course to create a bad bank to begin cleaning up lenders’ balance sheets starting next month. It’s also pushing ahead with a plan to sell state assets, including Nova Kreditna Banka Maribor d.d. and Telekom Slovenije d.d., starting in September, according to Finance Minister Uros Cufer.

Funding Secure

“It’s very likely that the rapid pace of non-performing loan deterioration will increase the recapitalization estimates above the 900 million euros earmarked by the government,” Carlos Ortiz, an economist at UniCredit Bank in London, said in a note to clients today. “On a more positive note, government funding for this year has already been secured despite the downgrades by both Moody’s and Fitch.”

The Adriatic nation sold $3.5 billion of debt on May 2, two days after Moody’s Investors Service cut its rating to junk. Fitch Ratings also lowered Slovenia’s credit score one level to BBB+ on May 17, citing a worsening economic outlook and a widening budget deficit. Standard & Poor’s rates Slovenia A-with a stable outlook.

The export-dependent economy will shrink 2 percent this year from a year earlier and 0.1 percent in 2014 before recovering in 2015, according to a May 3 forecast by the European Commission. Kranjec said today that exports may help improve the economic outlook.

Debt Increase

Slovenia, which became the first former communist nation to adopt the euro in 2007, saw its debt more than double to 54 percent of gross domestic product at the end of last year from 22 percent in 2008.

The debt-to-GDP ratio will surge to 71 percent next year before eventually settling at about 55 percent, Cufer said on May 9, when he presented the overhaul program.

“Adoption of the fiscal rule and hopes of a more ambitious program of fiscal consolidation as a result should be well received by the market, and by the European Commission,” Timothy Ash, an emerging-market economist at Standard Bank Plc in London said by e-mail today.

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