Slovenia delays debt ceiling debate as it struggles to push reform

By bne IntelliNews May 8, 2013

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In a further sign of just how hard Slovenia's struggle to avoid becoming the next Eurozone country to require a bailout is, the government was forced on May 7 to postpone a parliamentary vote on setting a cap on the budget deficit until later in the month.

Coming just a day after the recently-appointed government failed to secure agreement on other reforms, the country's politicians failed to agree the terms of the so-called golden fiscal rule. "The session on the fiscal rule is expected to take place after the next regular session, that is between May 20 and 24," parliament spokeswoman Gordana Vrabec told Reuters.

The debt ceiling cap is one of several measures the new coalition government, led by Prime Minister Alenka Bratusek, needs to implement in order to shore up its economy, which is struggling under a recession and a banking system - mostly state owned - that is burdened by bad loans worth about €7bn, or 20% of GDP. The government has promised to unveil a reform package on May 9, but investors are doubtful of its willingness and ability to push through the necessary spending cuts and reductions in the level of state ownership in the economy.

"Amazing what $3.5bn cash in the bank after a 'successful' Eurobond deal does for reform commitment," comments Tim Ash of Standard Bank, referring to the proceeds of a dollar bond sale last week. "The Slovene government is due to present its reform programme to parliament on Thursday, and the question is whether this will be ambitious enough - the [European Commission]/market will want to see an ambitious programme for state asset sales."

The Bank of Slovenia has also urged the government to speed up privatisation in sectors where "the market is more effective than state ownership" but gave no details. However, any attempt to sell off the state's significant stakes in the banking sector would likely need to wait for the non-performing assets poisoning the system to be siphoned into a planned "bad bank". Despite that, government sources were reported to have said on May 6 that there are plans to privatise the country's second largest bank - Nova KBM - and telecoms operator Telekom Slovenia this year.

However, the struggle to seal political agreement on reform raises doubts the fractious parliament is capable of doing enough to avoid what many see as the inevitable. According to a poll in daily newspaper Delo, 57% of locals now expect the country will eventually be forced to ask for a bailout. "[It's] notable that Olli Rehn, EU economy and monetary affairs commissioner, was hardly encouraging in terms of Slovenia's ability to survive without a Troika bailout in comments earlier today," Ash added in his note.

Slovenia had pledged to set the debt ceiling cap by the end of May, but the government and opposition are at odds over when it should be introduced. The fiscal reform entails changing the constitution, which requires a two-thirds majority in parliament. The centre-left government coalition controls 49 out of 90 parliamentary seats.

The economic reform programme, due to be drawn up by May 9, will then be presented to the European Commission. It comes as Ljubljana struggles to hit this year's budget deficit target of 3% of GDP, despite managing to reduce the gap to 4% in 2012 from 6.4% the previous year. The European Commission forecasts the gap will expand to 5.3%, as lower tax revenue meets hiked spending to prop up the banks.

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