Milestones: Is Slovenia Next In Line For A Bailout?


By Gilly Wright

While the new Slovenian government dismisses Cyprus comparisons, it could soon be facing the same fate, as €1 billion ($1.3 billion) of government debt comes up for renewal in June.

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Otilia Simkova, an analyst for political risk research and consulting firm Eurasia Group, agrees the Cyprus crisis spiked yields on Slovenian bonds but insists it was just an additional factor, not the main cause of the problems in Slovenia, which have been going on for at least 18 months.

“The two [countries] have been linked. However, beyond the fact that both have problems in their banking sector, parallels are limited,” says Simkova. “The Slovenian banking sector is significantly smaller than it [the banking sector] was in Cyprus, and nonresident deposits are very limited.” Simkova says Slovenia’s problem is the increasing level of nonperforming loans, which is now estimated to have reached up to 20% for the most troubled banks.

Luka Gubo, senior analyst and economist at Slovenian financial markets firm Finanni trgi, says the Slovenian banking system is still on the brink of collapse, even though the government recapitalized the biggest bank. “Because lending is, of course, frozen and companies are deleveraging, Slovenia is in a recession and will be until mid-2014 in the best-case scenario. One would expect that policymakers would try to improve the situation, but they are just making it worse.”

Gubo says the current government is incapable, and when combined with the country’s financing needs, that explains why bond yields are rising. He says the Slovenian government needs to borrow approximately €1.8 billion this year to refinance the old debt (plus another €2 billion in 2014), not including the 2013 deficit or the €3-to-€4 billion that would be needed if a bad bank was created. “This puts the number up to €7 billion just this year,” Gubo continues, “and I am not so sure that markets will be ready to lend the Slovenian government this amount at current yields.”

Realistically, Gubo believes there is a small probability that Slovenia will not need help from the EU-ECB-IMF troika; but only if a “bad bank” is created. “Basically,” he suggests, “it all depends if the markets will be prepared to lend the government a few billion euros, and, given the current government policies, which include protectionism and higher taxes, I am afraid markets will not be prepared to lend the money.”