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Slovenian report
by Euro Reporter
2013-11-22 10:00:38
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Slovenia struggles to avoid EU bailout

Primož Kozmus is a Slovenian national hero lionised for tossing a hammer to double Olympic gold. Soon he might be forced to honour his Alpine homeland another way: sacrificing his personal fortune to help avert a eurozone bailout. Slovenia’s banks are in such a dire state that Mr Kozmus is almost certain to face a so-called haircut, which will slice through the more than €100,000 of junior bank bonds he bought during Slovenia’s heady credit boom. “The money was safe and then they changed the rules,” said Mr Kozmus. “I’m an athlete, I represent Slovenia well in the world, I believed in my country. If this is my donation to Slovenia, if it helps, OK. But I’m not sure it will help them.”  He may be right. Junior creditors stand to lose about €500m. But tiny Slovenia – a tranquil, prosperous nation of 2m hemmed between the Alps and the Adriatic Sea – will need to plug a banking hole several times bigger to avoid becoming the next eurozone country to seek an international bailout. Over the coming months this place of hilltop castles and handsome Habsburg architecture will become the laboratory for the latest eurozone experiment in debt restructuring – one that will be heavily influenced by Germany’s deep political resistance to underwriting another rescue. The question is whether a blown-out eurozone economy can fix itself without foreign funds for the repairs.

It has been a painful reckoning for a nation once feted as the darling of the post-communist transition. Its export-led economy, the powerhouse of Tito’s Yugoslavia, escaped the carnage of the secession wars in the 1990s. Slovenia then cruised into the EU as the wealthiest of the 10 ex-communist members and joined the single currency in 2007. A defining characteristic was the “gradualism” of its transition, which shunned big-bang privatisation and foreign money. Slovenia’s economy changed in form but the nomenclature of industry carried on in charge, the state remained ascendant and credit flowed from banks largely owned by the government. If Greece’s downfall was a bloated public sector and Spain’s its runaway property, then Slovenia’s has been crony capitalism. The downturn exposed a corporate governance nightmare with a web of politically connected groups connected by opaque cross-guarantees and overly generous loans from state-backed lenders.  “Who cares for state-owned money?” asked Bostjan Jazbec, Slovenia’s central bank governor. “You know the joke: what car do you run 150km on a gravel road? Answer: the company car because you don’t pay for repairs. This is the best analogy for what went wrong; we were all driving the company car.”

The statistics are striking: banks are nursing €7.8bn of bad loans, equivalent to almost a fifth of economic output. (Household bad debt is relatively low, at just 5 per cent, which emphasises the severity of the corporate problem). For state-owned NLB, Slovenia’s biggest bank, about four in 10 Euros lent to businesses went sour, according to Sašo Stanovnik of Alta Invest. Boštjan Vasle, head of the government’s economic forecasting agency, said: “Somewhere in this process the proper way of doing business, of lending money, of running operations was somehow distorted by politics. Money was abundant but we lacked economic sense. It was irresponsible.” All eyes are now focused on a long-delayed bank stress test, which should conclude next month, and will determine the extent of the damage. Speculation is rife and credit rating agency Fitch recently raised its estimate of the system’s capital shortfall to €4.6bn. Slovenia has set aside €1.2bn of public funds. Bailing in Mr Kozmus and other creditors will yield about €500m. The government can also use some of its €3.6bn of cash deposits. But the margin for manoeuvre is tight. Alenka Bratušek, Slovenia’s prime minister and the leader of an unwieldy four-party coalition, is standing firm.

“We don’t need any outside help, we know how to solve the problems and we are going to do it,” she told the Financial Times. “We know best what is good for our country – not somebody from the outside. We are the ones that will have to carry out the measures and we will have to live with our people.” While similar proclamations were also made by leaders of Portugal, Greece and Cyprus, senior EU officials say Slovenia has a “fairly high” chance of coping alone. Berlin, eager to shield its taxpayers, has urged it to do so. But to some, a full bailout programme, with stringent reform conditions and outside supervision, might be a better option to smash the vested interests that brought Slovenia low in the first place.  Since a wave of street protests helped to sweep her coalition into power in March, Ms Bratušek has passed insolvency reforms, promised some privatisation and pushed through a hugely unpopular property tax on voters obsessed with not just buying houses, but building their own.  But in a difficult recent meeting, Mario Draghi, the European Central Bank president, urged Ms Bratušek to take more decisive action, especially with the banks.  “Do we need a nudge from somebody?” asked Mr Jazbec, the central bank governor. “I’m still having my personal dilemma.”


Struggling Slovenia gets boost from bond, confidence vote

Slovenia's government won a confidence vote and raised 1.5 billion Euros in a bond issue on Friday, offering the euro zone country some hope it can still steady its finances and avoid an international bailout. The dawn vote, by 50 to 31 after a marathon debate, shores up political backing for Prime Minister Alenka Bratusek's disparate alliance as the republic struggles with its worst crisis since seceding from Yugoslavia 22 years ago. The country later said it had made a private placement of three-year notes worth 1.5 billion Euros ($2 billion) to a single investor at a yield of 4.7 percent. "This issue shows that the financial markets are open to Slovenia," Bratusek told a news conference, saying she did not know the identity of the investor. Her foreign minister, Karl Erjavec, said: "Today it is absolutely clear that the government can succeed." The yield on Slovenia's 10-year benchmark bond eased to 5.88 percent by 1220 GMT from 6.14 percent on Thursday, dipping to its lowest level since May 15, according to Reuters data. The developments mark a fillip for Bratusek as she awaits the results of external stress tests on Slovenia's teetering state banks, due next month.

The government has earmarked 1.2 billion Euros to recapitalise the lenders but the real cost may prove far higher. The banks are being suffocated by an estimated 7.9 billion Euros of bad loans, equivalent to more than a fifth of economic output. Toxic loans accumulated with the onset of the global crisis when Slovenia's exports hit a wall and drove the country into the first of two recessions. Credit rating agency Fitch last week hiked its estimate of recapitalisation needs from 2.8 billion Euros to 4.6 billion Euros. This would be hard for the government to raise without help from the European Union and International Monetary Fund, which have bailed out other euro zone debtors since 2009. Slovenia's 'bad bank' expects to receive roughly 4 billion Euros gross in bad loans, its executive director Torbjorn Mansson said on Wednesday. Slovenia's 35-billion-euro economy accounts for only a small fraction of the 17-nation euro zone, but another bailout following that of Cyprus in March could further dent confidence in the bloc's ability to resolve its government debt crisis. "The vote of confidence did not erase the possibility of a bailout which depends upon what stress test results will show," said Marko Rozman from the treasury department of Dezelna Banka.

"In my view it would be sensible to ask for external help as that would be much cheaper than raising money on the market," he added. But Bratusek once again rejected bailout speculation. "I promised to do everything to enable us to solve our problems ourselves and that is exactly what we are doing," she told parliament after the vote. The country, once held up as a trailblazer for the rest of ex-communist Eastern Europe, fell into a new recession last year due to lower export demand, the credit crunch and a fall in domestic spending caused by budget cuts. The government plans to inject fresh capital into the banks later this year or in early 2014, after the results of the stress tests are published. The audit has delayed for six months a plan to ring-fence bad loans at Slovenia's biggest state banks, and the continuing economic contraction will have only made the problem worse. The government expects the recession to last until late 2014. After amendments, Slovenia's central budget deficit, without the bank recapitalisation, would fall to 2.9 percent of GDP (gross domestic product) in 2014 from 4 percent seen this year. The European Commission, however, says that with the capital injection the shortfall could reach 7.1 percent next year.


Stepišnik resigns from ministerial post

Slovenian Minister of Economy Stanko Stepišnik stepped down from his position on November 20 following revelations that his ministry had funded Emo-Toolbox, a company where he is one of the owners. “Public discontent and indignation was clearly unbearable for Stepišnik and the government in general,”

Even though the daily believes that Stepišnik’s decision is less damaging for Prime Minister Alena Bratusek than if she had lost her finance minister, the newspaper insists that the affair “confirms that [politicians] do not appreciate the distinction between the role of entrepreneur and that of senior state official.”

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