Slovenian coalition unraveling

By bne IntelliNews January 24, 2013

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A junior partner in Slovenia's ruling coalition has quit the centre-right coalition of Prime Minister Janez Jansa following corruption allegations against him. The move strips the government of its majority as the country tilts ever closer towards the need for a bailout.

Slovenia is now being run by a minority government as the Civic List (DL) coalition partner has followed through on a threat to leave the government. The party has quit the administration because Jansa refused to resign or face a confidence vote following a report by the state anti-corruption commission that said that he could not explain the origin of assets worth €210,000. Jansa has denied wrongdoing.

DL leader Gregor Virant said his party will now prepare for early elections. He has also resigned as parliament speaker, while two DL ministers will formally tend their resignations from Jansa's cabinet on January 28.

Crucially, that will see Jansa lose finance minister Janez Sustersic - a severe blow with the government trying to push through austerity measures necessary to avoid becoming the next Eurozone country to require a bailout. The economy has been back in recession since 2011 and the country's mostly state banks are crumbling under bad loans worth about 19% of annual GDP.

Even should the two other junior partners in coalition with Jansa's Democrats (SDS) - DeSUS and the People's Party (SLS) - postpone their departures until February and March, as they have hinted, the PM will be left will only 26 SDS votes, four from New Slovenia, and possibly two more from the Italian and Hungarian minority representatives, in the 90-seat parliament.

Jansa looks likely to hold on at the helm of a minority government, but only until parliament nominates a new prime minister or calls early elections. "The political crisis erupted the day the Commission for the Prevention of Corruption presented its grave and damning findings," Virant said. "The DL's departure from the coalition is the first step in the resolution of the political crisis."

That leaves the country facing the likelihood of a second snap election in little over a year, say analysts. "The minority government can continue for a while, but it seems that sooner or later an early election will be held," said Borut Hocevar, an analyst at the Slovenian daily Finance. "This crisis is certainly pushing Slovenia towards a bailout."

Raising that spectre, on the same day that Jansa's coalition began to crumble, 100,000 public sector workers went on a strike, with 10,000 taking to the streets of Ljubljana to protest planned wage cuts.

State employees are angry about a plan to lay off workers and cut wages by some 5% this year, on top of a cut of around 3% in 2012, as the government tries to narrow the budget shortfall to 3% of GDP from 4.2% last year. The public sector strike closed almost all schools, kindergartens and universities. Hospitals were offering limited care with reduced staff. Protests over the cuts and corruption allegations have caused regular disruption and sometimes turned violent.

Analysts worry that the political crisis will derail another important plank in dealing with the economy's problems - the plan to set up a "bad bank" to absorb toxic assets.

"A coalition break-up would represent a hurdle for the implementation of the proposed Bad Bank, despite the law already being approved, as key implementation rules have not yet been set up," warns Jaromir Sindel at Citi. "This would be of a particularly negative consequence, if the Bad Bank becomes the topic of any pre-election campaign."

Given such risks, the news hit Slovanian assets, raising yields and the CDS spreads. "[T]he uncertainty surrounding reform efforts will now take center stage for the next few months," note Erste analysts, before pointing out that that ripples are not limited to Slovenia. "This has ramifications for Croatia (given the fact that Slovenia still has to ratify Croatia's accession to the EU)," they write, "and yields on Croatian USD Eurobonds went up 10-15bps at the longer end."

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