Battle against time for the government of Slovenia

Battle against time for the government of Slovenia

 

Review by Christos T. Panagopoulos –

Alenka Bratušek’s government is likely to win a confidence vote on Thursday, despite the country’s financial situation, as it struggles to manage the cost of a bank clean-up, which risks tipping its finances over the edge.

The 43-year-old Prime Minister has already been making a big effort – and with very few political allies – to tackle the biggest economic crisis which hit the country since it broke away from the former Yugoslavia 22 years ago.

But her government could yet have to turn to the European Union and International Monetary Fund for help if external stress tests reveal it has not budgeted enough to resolve the bad loan crisis afflicting Slovenia’s mainly state-run banks. The test results are due in a month.

“The government will win the confidence vote but that will not scrap the bailout option which largely depends upon the results of the external stress tests of the banks”, said Saso Stanovnik, chief economist at investment firm Alta Invest. “I still believe Slovenia should be able to raise enough money to avert a bailout”, he added.

The government wants to raise taxes, cut spending and sell off more than a dozen state-controlled companies. It has linked Thursday’s vote to amendments to the 2014 budget, which focus on taxes on real estate, and is confident of the support of a majority of MPs.

But Slovenia’s success in averting an EU/IMF bailout – and the painful conditions and oversight that come with it – hinges on the cost of cleaning up an estimated 7.9 billion euros ($10.6 billion) of bad loans, equivalent to more than a fifth of economic output.

The cost of bank clean-up

Non-performing loans shot up with the onset of the global financial crisis, when Slovenian exports hit a wall and a recession exposed the flaws of an economy once held up as a trailblazer for the rest of ex-communist eastern Europe.

The government plans to inject fresh capital into the banks later this year or in early 2014, after the results of the stress tests are published, probably on December 13.

It has earmarked 1.2 billion euros for the recapitalization, but the real cost may prove far higher. Credit rating agency Fitch last week hiked its estimate from 2.8 billion euros to 4.6 billion euros, which would be hard for the government to raise without help from the ‘troika’ of official lenders who have been bailing out euro zone debtors.

The audit has delayed for six months a plan to ring-fence bad loans at Slovenia’s biggest state banks, while continuing economic contraction will have only made the problem worse. The government expects the recession to last until late 2014.

Under the amended budget, Slovenia’s central budget deficit, without the bank recapitalization, would fall to 2.9% of GDP in 2014 from 4% seen this year. The European Commission, however, says that with the capital injection the shortfall could reach 7.1% next year.

But at the start of the budget session on Monday, Bratušek again assured parliament that a bailout can be averted.

“There will be no troika (in Slovenia) because we know how to reach our goal by ourselves”, she said.

Source: Reuters