Slovenia Liquidates Two Banks to Stave Off Cyprus Fate

Slovenia liquidated two of its smaller banks, Probanka d.d. and Factor Banka d.d., in a move described by Central Bank Governor Bostjan Jazbec as a preemptive action to avoid the fate of Cyprus.

“This measures have been taken to stop a possible deposit withdrawal from other banks,” Jazbec told reporters in the capital Ljubljana yesterday. “The central bank and the government are trying to avoid the Cyprus scenario.”

Burdened by non-performing loans equaling about a fifth of the Slovenian economy, the Adriatic nation’s mostly state-owned banks pushed it to the brink of a bailout in March after Cyprus’s rescue triggered a sell-off in weaker euro-region assets.

Factor Banka, based in Ljubljana, and Probanka, based in the north-eastern city of Maribor, with combined total assets of about 2 billion euros ($2.6 billion), will faced supervised liquidation, Jazbec said.

Lenders including Nova Ljubljanska Banka d.d., Slovenia’s largest, are struggling under the weight of rising bad loans, after five quarters of recession pushed overburdened companies into bankruptcy and depleted lenders’ capital.

“Although an expected step into the right direction, the move to wind down both banks has been delayed for too long,” said Andraz Grahek, managing partner at Capital Genetics in Ljubljana.

Liquidation Costs

The cost of liquidation of Probanka and Factor Banka will be borne first by owners, followed by holders of subordinated debt, Finance Minister Uros Cufer said at the joint press conference with Jazbec yesterday.

Even so, Slovenia will issue state guarantees of 490 million euros for Probanka and 540 million euros for Factor Banka “that will ensure an unhindered liquidity and normal fulfillment of obligations of both banks to ordinary creditors,” Banka Slovenije said in an e-mailed statement. The European Union said the guarantees were given temporary approval.

Capital Genetics’ Grahek called the state support “shocking” and questioned why “the failure of two privately owned banks that are neither material or systemic has prompted the government to issue guarantees of round 1 billion euros to provide liquidity and cover losses that should have been taken by creditors and deposit holders.”

“This is against the concept of the banking union and transfers unnecessary burden to public finances,” he said. “I believe this is a mistake that can backfire and shows there is a state of panic.”

Overhaul Delayed

Prime Minister Alenka Bratusek’s government has delayed a fix of the bank industry originally planned for the end of June due to a dispute with the European Union over banks’ capital needs and the value of their bad assets.

Factor Banka reported a loss of 5.3 million euros in the first half, compared with a 2.9 million-euro profit a year earlier. Assets declined 11 percent to 913 million euros at the end of June from the end of 2012. Among the bank’s owners is Nova Kreditna Banka Maribor d.d., Slovenia’s second-biggest lender, with a 10 percent holding, according to Factor Banka’s semi-annual report.

Probanka’s first-half loss narrowed to 6.8 million euros from 12.5 million euros a year earlier. Assets declined 5 percent to 981 million euros.

Cumulative 2013 losses in Slovenia’s bank system reached 215.6 million euros in June, doubling from May, according to data the central bank released Sept. 2. Loan-loss provisions rose to 7.54 billion euros, or 16.3 percent of all outstanding loans, the central bank said.

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