Guy Norton in Zagreb -
While 2013 was characterised by on-off bouts of panic about whether the Slovenian authorities could act decisively enough to quell fears of a meltdown in the financial sector - something they eventually achieved - the goal this year will be to press on with rehabilitating the banking sector so it acts as a driver rather than a drag on economic growth. But as criticism of the "bad bank" set up to deal with the problem loans shows, bumps are likely along the way.
Increasing clarity over the actual final price of the stabilisation of the financial sector - likely to come in at a total cost of €4.8bn, or 11.1% of annual GDP, based on the findings of a banking system stress test and asset quality review completed in December 2013 - has helped to rebuild confidence in Slovenia among both credit rating agencies and investors. Although the €4.8bn worst-case scenario estimate was four-times the government's overly optimistic €1.2bn prediction, it was nevertheless less than half the €10bn figure that some pessimistic analysts had forecast.
As a result of growing confidence in the country's economic future at the end of January, Moody's Investors Service revised the outlook on Slovenia's 'Ba1' sovereign rating outlook from negative to stable, even though economic growth is likely to remain in negative territory until 2015 at least. "As the uncertainty surrounding the size of the banking system's capital shortfall receded, yields on the sovereign's debt securities and liquidity pressures have fallen, allowing Slovenia more room for manoeuvre in seeking additional funds and diminishing the probability of the government losing access to the private debt markets," Moody's said.
Moody's assessment that Slovenia is finding it easier to convince investors of its credit-worthiness was borne out in mid-February when it received $16bn worth of orders for a dual tranche bond, comprising $1.5bn of five-year notes and $2bn of 10-year notes. Subsequently, yields on Slovenian sovereign debt have hit a four-year low on the international markets, with the country's 4.625% September 2024 benchmark issue trading at a yield of 3.9% by the end of the first week of March, sharply down on the 6.3% level Slovenian debt was trading at in November 2012 when investor concerns about the general health of the country's economy were at their height.
Resistance to change
Although the financial health of many of the Slovenian banks is still far from rosy - at the start of March the country's biggest lender NLB reported a net loss for 2013 of €1.44bn, the biggest ever loss in Slovenian corporate history - internationally there's a growing sense of equanimity about the state of play in the banking sector. "Compared to previous administrations the current government is clearly starting to get to grips with the problems in the banking sector," says Michael Glazer, a consultant for business advisory firm Wyn River. "But as the EU and the European Central Bank have pointed out that doesn't mean that there aren't a lot of problems that still need to be resolved."
He adds that part of the reason that the banking sector rehabilitation has taken so long to resolve has been due to the fact that many business owners are resisting having to sacrifice their ownership rights. "There's been a lot of resistance from so-called tycoons who don't want to give up their equity holdings without a fight and that is delaying the banking sector clear-up process," says Glazer.
Domestically, there's been plenty of disquiet about the terms and conditions of the bank restructuring process. For example, the VZMD Association of Small Shareholders has filed a lawsuit at the Ljubljana Administrative Court against Banka Slovenije, the Slovenian central bank, over the losses they suffered on subordinated debt bonds issued by three banks - NLB, NKBM and Abanka - when investors were required to participate in a restructuring of the banks in December. In a statement to Slovenian news agency STA, the VZMD claims the bonds were "erased without any explanation, compensation, and what is more the expropriated bondholders have even been denied access to the documents that wiped them out, as Banka Slovenije is claiming they contain confidential data."
The write-off of subordinated debt totalled €257m at NLB, €64m at NKBM and €120m at Abanka. Of the roughly 2,000 bondholders, almost half of them were private individuals. In defence of the government's actions, the central bank's governor, Bostjan Jazbec, stated that under EU state aid rules Slovenia was only permitted to recapitalise the banks with public funds after existing shareholders and holders of subordinated debt had participated in the restructuring.
Meanwhile, there's also been widespread criticism in the Slovenian media of the workings of the Bank Assets Management Company (BAMC), the so-called "bad bank" that was established last year to oversee the rehabilitation of the banking sector's non-performing loan (NPL) portfolios.
Last month senior officials at the BAMC convened a special media briefing to address the concerns expressed by the press, which included claims that it had been slow to start work, it had employed too many foreigners, had hired an excessive number of consultants and its operating costs had been too high. In a robust defence of the BAMC's actions to date, its leading managers claimed that contrary to popular belief in the media the bad bank has already proved to be a great success and helped to greatly improve investor confidence in Slovenia and its banking sector.
Lars Nyberg, chairman of BAMC's management board, a veteran Swedish banker who masterminded the establishment of the BAMC in March 2013, claimed that despite assertions to the contrary, the body had been readied for action in an amazingly short period of time. "When you establish a company like this it normally takes nine months to a year, because you have to recruit the people and establish the policies and all that," said Nyberg, adding that within two months of its establishment the BAMC had been ready to accept the transfer of NPLs that had been demanded by government ministers.
Given the initial tight deadline set by the Slovenian authorities, Nyberg said the BAMC was effectively forced to bring in consultants at very short notice to conduct all the necessary technical analysis in order for the envisaged transfer of assets to take place at the end of May. In actual fact the delivery of bad loans was delayed until after the conclusion of a banking stress test and asset quality review in December that had been requested by the European Commission.
Nyberg said that while the BAMC had expected to be able to complete the transfer of assets by the middle of this year, it was actually told to complete the task before the end of 2013, which effectively involved two weeks of frantic activity before the Christmas period. "I've never experienced anything like this... [in terms of] the changes from month to month and the demands placed on the organisation and the flexibility following that."
Responding to criticisms that BAMC had favoured hiring foreigners over Slovenians for most of the senior positions on its full-time staff and the alleged excessive use of consultants to work alongside them, Nyberg said: "Having been here [in Ljubljana] for a year now... I can say it's not true what is said in the papers sometimes that the necessary skills were available in Slovenia. They were not and we had to bring these skills in from outside."
He added that the use of experienced, highly qualified consultants had been necessary to instil some much-needed belief in BAMC's institutional capacities. "To be honest, the international credibility of the financial system in Slovenia was very low and the consultants helped us to bring the credibility... that was necessary for the European authorities to say, 'This looks OK'."
According to Nyberg, the advice and knowledge imparted by consultants to BAMC staff, which numbered 20 at the start of 2014 and will increase to around 70 by the second half of the year, has helped to develop skills that will remain in Slovenia long after the BAMC has completed its mandate and helped to resolve the crisis in the banking sector.
In terms of the costs and hours billed by consultants, Nyberg claimed the lack of complete information and data supplied about the assets that have been transferred to the BAMC has led to consultants having to conduct a lot of unnecessary and time-consuming analysis themselves. "That's been costly, no question about that, and partly unnecessary as we could have been given the information by the commercial banks and the central bank, but this was not the case."
In terms of the BAMC's operating costs to date, Nyberg claimed that the €5m in total staff and consultancy costs in the course of the BAMC's nine months of operations from March-December 2013 were a fraction of the more than €20m paid in consultancy fees on the banking system stress test and asset quality review last December. "That's a huge cost and you can certainly question what you [Slovenia] got out of that compared to what we got out of our consultants... We have done what was not expected to be possible in such a short period of time and that was the successful transfer of assets from the banks to the BAMC."
Furthermore, that €5m figure represents just 0.2% of the costs compared with the €1.5bn worth of assets that had been transferred to the BAMC by end-2013. Nyberg added that as a direct result of the successful completion of the asset transfer to the BAMC, rates on Slovenian government bonds fell by 100-150 basis points (bp) and claimed that would translate into lower overall borrowing costs for Slovenia in the future. "A 100bp [reduction in yield] will mean €300m a year in saved costs. I can assure you that if we had failed with the transfer, the rates would not have fallen in the way they did,"
Whether BAMC's management has successfully mollified the public concerns about role remains to be seen, but no matter how successful the country's bad bank proves to be the hard-pressed Slovenian taxpayer is still looking at a multi-billion-euro bill to put right the wrongs of Slovenia's banking sector past.
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