The IMF says that Slovenia will need to issue €3 billion in bonds this year. Since yields have short up from 4.5% to to as high as 6.4% as a result of the Cyprus rescue, that could be a costly order. And notice that these are dollar bond yields; the country is taking currency risk to get these funding rates. The country may be forced to seek painful assistance from the Troika.
Slovenia is commonly depicted as a potential victim of the botched Cyprus bailout, but if it is treated harshly, it will really be a victim of the hardening of attitudes in the northern nations. Austerity continues to drive periphery country economies into depressions, worsening their debt to GDP ratios, one of the key metrics the Eurocrats watch. But the surplus nations refuse to admit that their policies have failed, since they are trapped in a morality tale that depicts the debtor nations as profligates who must be punished. Never mentioned is the fact that debt levels in all advanced economies rose as e result of the global financial crisis, brought to you by American, British, French and German banks.
Like Cyprus, Slovenia’s problem is its banking sector. But it’s a tame 200% of GDP, while most measures put Cyprus’ banks at 800% to 900% of GDP. One of Slovenia’s biggest banks was one of only four in Europe to fail the capital targets (two were the banks in Cyprus now inflicting haircuts on big depositors). Non-performing loans at the three biggest banks, according to the IMF, rose from just under 16% in 2011 to over 20% last year. That means they are insolvent. The debt is mainly corporate debt, the result of lax lending by state owned banks to cronies. Slovenians commenting on a Washington Post article on the possible bailout focused on the corruption. Some examples (each paragraph is a different author):
One of the major problems here in Slovenia is that “everyone knows everyone”. This way the local wannabe managers (financial thiefs) in tie with scumbag politicians (big banks are in majority owned by the state) made some “friendly loans” that were unsecured. Those loans were then used to buy out the stock of the companies by the people managing them (manager buyouts). Yes it stinks to the high heavens. The companies later either dropped in value or went bankrupt..no way to repay a loan.. The biggest bank NLB is their milking cow…it gets recapitalized over and over by the people so the scum can take advantage of it and funnel the money they make out of the country in places like…Cyprus…
The crisis in Slovenia is result of ill conceived privatization policy of state enterprises initiated by incompetent right wing government of 2004-8 that resulted in a series of huge leveraged manager’s buyouts financed by banks: with the start of financial crisis in 2008 these manager’s buyouts went bust and banks were left with bad loans. True, in last few years a lot of corruption and white collar crimes were uncovered on all levels of society.
Corruption is finally getting some attention (it brought down Janša’s government and the mayor of Maribor, Slovenia’s second largest city) and has been in the spotlight the last few days as the new Minister of Infrastructure and Space (think zoning and land use) and the brother of the ex-president of Slovenia have both been caught building illegal buildings without permits on land restricted to agriculture. The minister had to step down, the shortest term, 4 days, for any minister in the short history of the country (a bit over 20 years old).
1/3 of the rescue funds would go to shoring up the sick banks. Slovenia hopes to avoid that by having the banks earn their way out of their hole. Reuters described the approach:
One of the key tweaks now under consideration, according to RBS, is the creation of internal bad banks within each of the country’s largest financial lenders, postponing any transfer of toxic assets to an external bank asset management company to a later date.
“Initially, bad assets would be transferred to the internal bad banks and backed simply by government guarantees,” said Abbas Ameli-Renani, an emerging market strategist at RBS.
Under the original proposal, assets would have been transferred immediately to the BAMC in exchange for newly-issued government bonds.
While there will be a simultaneous recapitalisation of banks under both arrangements, the new version would not result in an immediate spike in the government’s debt level, because the authorities would initially provide banks with guarantees rather than newly issued securities.
One of the downsides, however, is that the plan will keep bad assets on banks’ balance sheets and under the same management.
Richard Field adds:
Keeping the bad assets on banks’ balance sheets is not a ‘bug’, but a feature. By making the banks absorb the losses on all the excess debt in the financial system, the government is establishing how much in the way of future earnings must be retained to recapitalize the banks.
Going forward, the banks will retain 100% of pre-banker bonus earnings until they have rebuilt their book capital levels.
While it is conceivable this approach could work, I would not give it high odds. The last time I can recall it succeeding (as opposed for serving as official cover for zombification) was in the US in the aftermath of the S&L crisis. Many of the surviving banks had dangerously low capital levels. Many banking experts at the time were deeply worried about more failures and whether the banks were too weak to do enough lending to support growth. Greenspan engineered an unprecedentedly steep yield curve to help banks rebuild their balance sheets and their recovery was faster than the pundits expected.
The reason I doubt this approach can restore the banks to health (although it can reduce the size of the funding needs) is that first, they are deeply insolvent. Second, they don’t have the tail wind of easy and unusually rich “borrow short-lend long” profits. Third, the economy in the Eurozone is deteriorating, and a small open economy like Slovenia is certain to share in the pain. Fourth, housing is overvalued, and a fall in that market could leave the banks with more losses.
By contrast, Slovenia’s debt to GDP ratio is a modest 54%, which would seem to give it a fair bit of borrowing headroom. But skittish markets aren’t discriminating. If its interest rates remain high or rise, Slovenia may turn to the Troika of help. And that is where things could get ugly.
Some believe the dictatorial posture that the EU and IMF, particularly the EU, took with Cyprus was the result of the rise of an anti-Euro party in Germany. Its position is that continuing to provide support to periphery countries is bad for them and Germany. Merkel needs to play tough through the elections regardless; the anti-Euro party appears to be shifting the benchmarks for what “tough” means.
One open question is what stance the new center left government will take in any negotiations. The president, Alenka Bratušek, has made clear that she wants to give priority to growth, not debt reduction. But that does not square with Germany’s position. Slovenia and Germany could get into a row over the reforms required of Slovenia in return for assistance. If Slovenia attempts to push back against the Troika, it’s certain to get a forceful rejection just as Cyprus did. And another display of brute force is unlikely to go unnoticed by Italy and Spain.