As Cyprus received the first tranche of its bail-out money this week, investors wondered which might be the sixth eurozone country to require a rescue. Enter Slovenia, with an annual GDP of €35bn, around 4% of eurozone output. As in Cyprus and Ireland, it's a case of a bust banking system potentially bankrupting the country too.
Overall debt is 53% of GDP, among the lowest in the European Union. But it has doubled since 2008, partly because of cash injections into the increasingly damaged banking sector, and could rocket further if the government has to recapitalise the banks. A property boom and bust, along with the downturn in neighbouring states, has left the largely state-owned banks with bad debts of about €7.5bn. A double-dip recession is threatening to increase this figure.
Bad loans are worth about 20% of all loans, and this figure could well rise to 27%, according to investment bank Keefe, Bruyette & Woods. Credit-ratings agency Moody's, worried about the ultimate costs of plugging the holes in the banks' balance sheets, has downgraded Slovenia's government paper to junk.
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Plans to shift some bank assets into a so-called bad bank, thus getting dud loans off bank balance sheets and paving the way for new lending, will soon be presented.
In the meantime, the government has put forward some money-raising plans, including an increase in VAT and a sell-off of 15 state companies. European officials don't think much of this. It's "not a consistent or forceful programme", one told Reuters.
But for now, financial markets are giving Slovenia the benefit of the doubt. A strong appetite for risk among investors allowed the country to sell bonds worth €2.7bn earlier this month. That should see it through until the end of the year. But next year it needs to raise almost €6bn, as Morgan Stanley points out.
Given the uncertain economic outlook, "investors would like to have a backstop from the EU to comfortably invest in Slovenia's bank restructuring", says Mai Doan of Bank of America Merrill Lynch. By then, of course, overall eurozone jitters could well have returned too, given the sorry state of most of the periphery. It will be the usual story, reckons Doan. "The government will resist an EU package until it's pushed to do it by the markets, when yields rise to uncomfortable levels."
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