OECD report sparks new efforts to quell Slovenian bailout worries

By bne IntelliNews April 10, 2013

bne -

Following a damning report on the economy from the OECD, Slovenian Prime Minister Alenka Bratusek insisted on April 9 that her new government is committed to fixing the country's banks, which are saddled with a mountain of bad debts as a double-dip recession continues.

The OECD report sounded just the latest warning that Slovenia faces the threat of a bailout sparked by a "severe banking crisis," and called for quick action from Ljubljana. While Bratusek admitted the country does not face an easy task, she denied that it would be forced to seek international help.

"The new government is determined to do everything in its power to solve its problems by itself," she told a press conference, after holding talks with European Commission President Jose Manuel Barroso. "We are aware that the banking sector is the number one problem in Slovenia," she said according to The Guardian.

In its Economic Survey of Slovenia 2013, the OECD blamed the continued problems in the banking sector on excessive risk-taking, weak corporate governance and limited regulatory supervision. It warned that non-performing loans already make up 14% of bank balance sheets, and that they will escalate as the economy shrinks by an estimated 2.1% this year. "Additional and far-reaching reforms are needed as soon as possible to restore confidence and head off the risks of a prolonged downturn and constrained access to financial markets," said the OECD.

It also warned that the scale of toxic debt in Slovenia could be larger than official estimates - a worry that investors appear to share. Borrowing costs rose at an auction of short-term debt on April 9, with Slovenia selling no more than €56m of bonds against a maximum target of €100m. The yield on six-month bills, last auctioned on March 12, rose to 1.7% from 1.5%, while the yield on one-year bills rose to 2.99%, from 2.02% at a February auction. The next T-bill auction is due on May 15.

Finance Minister Uros Cufer said the country has sufficient funding to last until autumn. Igor Luksic, president of the Social Democrats - the second biggest party in the three-week old centre-left coalition government - reiterated the point to Reuters, insisting that will allow Slovenia to avoid a crunch when treasury bills of about €1bn fall due in June, and predicting the country will maintain access to international debt markets.

"I was told Slovenia has enough money until September," Luksic said. "I believe we will be able to raise some money on the world market by then." The government is currently trying to find a way to issue bonds "as soon as possible and for the lowest price," he added.

Regarding the likelihood that Slovenia will be pushed into asking for a bailout, he said: "It's always possible but it is not our first option. I'm afraid of organised pressure of financial markets which we cannot fight against ... We need European support - not to give us money but to support us in believing we are able to manage by ourselves. The EU has so far not been helpful."

Taking his cue, Barroso also bid to push confidence in the new government's ability to stave off disaster. The European Commission is confident Bratusek will deliver the economic reforms to lead Slovenia back to growth, he claimed, while firmly rejecting suggestions that Slovenian savers should fear a repeat of the Cyprus bailout, in which large deposit holders are suffering heavy losses.

"It is a completely different situation in Cyprus and in Slovenia," said Barroso, echoing the statements issued by officials in Ljubljana since the Mediterranean island was forced to cut a deal with Brussels in late March. The size of Slovenia's banking sector is less than 1.5-times its annual GDP while Cyprus's was about eight times the island's GDP when it finally hit the wall.

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