Slovenia’s ongoing banking crisis is heading toward its peak as the November date for the debt-ridden Slovenian banks’ stress test results closes in.
Slovenian central banker Bostajan Jazbec has recently reinforced his September statement by announcing that the country will ask for outside help if the yields on government bonds become too expensive. This limit is generally perceived to be 7 percent. The interest rate on 10-year benchmark bond currently stands at 6.73 percent, making it by far the highest in all of the Eurozone. Nobody is really sure what the stress test will bring or exactly how much the Slovenian government will need to pay off its debts.
The Slovenian central bank has slashed its growth forecasts by predicting a 2.6 percent drop in GDP for 2013 and 0.7 percent drop in 2014. In addition, the Prime Minister Alenka Bratusek publicly admitted that the total cost of restructuring its failing banks is still unknown. 18 Slovenian banks have around €8 billion of bad loans – a figure that is still rising – and the government has set aside around €1.2 billion to cover the restructuring of the banking sector. But this might not be enough, as the cost of recapitalization could be as high as €5 billion. Analysts forecast that the government could sustainably cover costs of up to €2 billion, thereby requiring a bailout.
Slovenian domestic politics could also trigger a bailout. Slovenia’s ruling political party Positive Slovenia postponed its election congress, due to be held on 19th October, because the party has gone through a mini-political crisis since Ljubljana’s mayor Zoran Jankovic announced his decision to challenge Prime Minister Alenka Bratusek’s leadership position in the party. This could pose a potential blow to the fragile ruling centre-left ‘coalition of responsibility’ and trigger new elections, which would certainly affect Slovenia’s economic reforms. The coalition is already under strain for trying to limit the negative impacts of austerity measures and structural reforms implemented to tackle the crisis.
Government officials are still united in the position that Slovenia can handle its finances on its own. In late September, the Parliament endorsed the bond repurchase transactions programme that creates a legal basis for the repurchase of debt securities and should, according to Finance Ministry State Secretary Mateja Vranicar, “improve the flexibility of government borrowing and optimise borrowing costs.” In early October, the Government also introduced changes to the Banking Act, a bail-in mechanism that would incorporate creditors into the recapitalization process.
Still, it seems that Slovenian politicians are already preparing the ground for the potential bailout. In addition to Jazbec’s statement, the interior minister Gregor Virant reiterated that the cheapest option for the recapitalization of the banking sector might be to seek help from the European Stability Mechanism (ESM). Janez Jansa, the former prime minister and the leader of the largest opposition group, has also called the government to ask for financial assistance before the level of the non-performing loans becomes unsustainable.
The most crucial period for Slovenian bailout prospects will be between late November, when the banking stress test is expected, and April 2014, when the country will have to borrow an additional €1.3 billion to repay the maturing Eurobond package. Should the test prove that more funds are needed than previously estimated to recapitalize the banking sector, the most likely scenario will be a rise in the interest rates on Slovenian bonds, which might coincide with the April bond repayment. Should this occur, it is most likely that the government will have to ask the ESM for financial help. In this case, the government would likely try to arrange a limited programme that would only affect the banking sector and financial regulation. Such a move would allow the government to access much-needed funds without limiting Slovenia’s economic sovereignty.
Another bailout scenario might involve the use of funds from the Outright Monetary Transactions (OMT) programme. The European Central Bank bond-buying programme was introduced in January 2013 to prevent the speculative rise of market interest rates. Slovenia might be the first country to be forced to use the OMT mechanism. It would certainly inject much-needed liquidity into the Slovenian economy and lower the interest rates on government bonds. This would, however, also come with a set of structural reform conditions. The only question is, would that imply the introduction of a full, Troika-style macroeconomic adjustment programme such as the one imposed on Greece, Portugal and Ireland, or a less strict precautionary programme? As it stands, the Slovenian government is still trying to avoid both.
