Is Slovenia the next shoe to drop?

March 21, 2013

The Cypriot saga has thrown the spotlight on Slovenia, which is also a small euro zone country struggling with an over-burdened banking sector.

Slovenia’s mostly state-owned banks are nursing some 7 billion euros of bad loans, equal to about 20 percent of GDP, underpinning persistent speculation that the country might have to follow other vulnerable euro zone countries in seeking a bailout.

According to Standard Bank’s head of emerging market research Tim Ash:

The latest crisis in the euro zone, this time in Cyprus, continues to raise questions as to possible contagion effects throughout the region, and in particular which economies could be next.

Perhaps first in the firing line/spotlight is Slovenia, which is also currently grappling with its own banking sector crisis, and trying to fend off a Troika bailout.

Slovenia’s central bank was quick to dismiss any comparisons between the two euro zone countries this week, arguing on Monday the cases were different because Slovenia’s banking sector was much smaller relative to its economy than Cyprus’. It said deposits in Slovenian banks are safe.

The central bank said in a statement:

One of the reasons for the tax on the deposits in Cypriot banks is the large share of deposits of foreign citizens there. In Slovenia, the share of foreign depositors is symbolic.

But Commerzbank says “Slovenia is likely to seek a refuge under the bailout umbrella in the second half of this year”. According to Christoph Weil, senior economist at the German bank:

I think Slovenia will ask only for a banking bailout but I would expect the euro finance ministers would demand a full economic adjustment program and measures to consolidate the budget and to reform the economy, meaning it would end up being a full-blown bailout.

They will need to issue bonds in the primary market if they need to recapitalize their banking sector but recent history does not bode well for this, Weil said:  

Since March 2011…Slovenia has not issued any more new bonds in euros. In October 2012, one dollar bond was issued -Slovenia’s first. Only one dollar bond in two years is a bad omen for Slovenia’s ability to tap into the capital market.

Janez Jansa, the country’s former prime minister, agrees, saying on Thursday the country must issue a bond by June 6 to meet its financial obligations.

Markets are not yet pricing in a bailout for Slovenia, analysts say.

Ten-year Slovenian bonds last yielded 5.21 percent, above their Spanish and Italian equivalents but still some way off the 7 percent levels beyond which other sovereigns sought aid.

The cost of insuring Slovenian debt against default was at 260 basis points, according to Markit, less than Spain’s 285 and Italy’s 286 basis points.  

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