With last week dollar bond emission a bail-out from the troika was avoided in the last minute for 2013?
Yes, the new government put tremendous effort in sucessful launching of the dollar bond emission. The bond emission per se was not questionable as there is an overhang of funds in the US financial markets seeking for profitable investments. In this respect, Slovenia with its relatively low public debt and manageable deficit is a relatively good investment opportunity. Slovenia is a good client to make easy money on. One can easily put it under pressure and skyrocket the borrowing rates. This is reflected in the rates of current dollar bond emission. However, the price paid for this ‘last minute financing’ is – when compared to Italy or Spain – quite high. Borrowing money at this rate is unsustainable, in particular in regard of the current recession.
The numbers for the bond emission of last week is 4.95% for 5y and 6% for 10y, indeed above the present Portuguese yields in the secondary market, but below the 7% red threshold for the 10y benchmark. Spanish and Italian yields are around 4% for 10y benchmark in the secondary market. Which yields do you think will bring Slovenia out of the danger zone?
Traditionally, Slovenian bond yields in the secondary market have been strongly correlated with the Italian yields. Hence, bond yields below or at par with the Italian yields would signal that Slovenia has escaped the danger zone. This would also bring down the bond rates in the primary markets to the levels of Italy.
What are the prospects for 2014 and beyond regarding debt and deficit financing?
Due to huge debt increases in the last four years by roughly 35% of GDP relative to 2008, whereby most of the new debt was mid-term, Slovenia will be under pressure of refinancing needs in the coming years. Next year Slovenia will have to refinance about 3.5 bill euro of outstanding debt, i.e. about 10% GDP, and then it will need at least 1 bill euro (about 3% GDP) for financing current deficit. This will again put Slovenia under massive pressure by financial markets. Hence, credible reforms need to be implemented this year in order to regain credibility in financial markets.
The main short-term problem now remains with the recapitalization and restructuring of the bank system?
The main problem of Slovenia since the outburst of the crisis is placed in its troubled banking sector. The government in place during the 2009-2011 neglected the problem completely, whilst instead took up a lot of new debt for financing the swelled budget deficit, but without tackling the problem of the troubled banks. This has amplified the crisis leading to a typical credit crunch that finally protracted to the capital crunch. Now, with the output lower by 10 per cent and public debt higher by some 35 % of GDP relative to 2008, it is much harder to tackle the problem. By June this year, the government will have to establish the bad bank taking up banks’ troubled assets in the amount of at least 4 bill euro (11.5 % GDP) and then to provide additional fresh capital in the amount of 1 to 1.5 bill euro (3 – 5 % GDP). But then again, additional funds will be needed to assist troubled firms with huge debt leverage. This can require additional state guarantees in the amount of 1 to 2 bill euro.
How Slovenia can deal with the bank problem? Only through privatization and internal measures, or will need a bail-out specific package similar to Spain?
This year is crucial for solving the banking problem. This year Slovenia can still resolve the problem alone. By next year, with further falling economic activity, the troubled assets in Slovenian banks may well inrease to the levels of 20% to 25% of banks’ balance sheets making it virtually impossible to handle the problem alone. The current bank bail-out plan assumes that government will issue bonds in the amount of some 4 bill euro and exchange it for banks’ troubled assets. Before that, these troubled assets had to be converted to capital stakes in firms with non-performing loans. Hence, with cleaning the banks’ balance sheets the government agency will also take up the process of restructuring the leveraged firms and selling off the capital stakes in these firms. After banks’ balance sheets have been cleaned, the government may privatize them. Recently, the new government already announced to privatize the second largest state-owned bank, NKBM. But I don’t think the government can avoid to privatize also the rest od state-owned banks, such as NLB and Abanka. (Note, that combined market shares of three state-owned banks (NLB, NKBM and Abanka) is close to 50%). This privatization will simply be commended by the refinancing needs in the following two years.
Is there a risk for a bail-in process in the banking problem, like in Cyprus? Or, Brussels and the IMF and the ECB will find out a specific solution for Slovenia?
I don’t think that bail-in process is possible in Slovenia. Unlike Cyprus, there are no large or even foreign depositors in Slovenian banks as most of the bank deposits consist of small scale household deposits. These, however, are guaranteed by the law. Violating the law and putting additional burden of bank rehabilitation on households, on top of the increased public debt that has to be paid by increased taxes, would lead to massive social unrests.
On the other hand, I wouldn’t mind if Brussels and ECB had engaged in preparing a specific bail-out package for Slovenian banks similar to Spain. This would enhance the transparency of the bail-out process and minimize the cost for taxpayers. I am pretty much concerned that the Slovenian government will engage in a sort of homemade and non-tranparent bail-out solution that will jeopardize its efficiency and increase the cost for taxpayers. Note that state ownership of the banks and substantial control of the government over businesses have in the first place brought this country to the current unpleasant situation on the verge of bankruptcy.
It seems most people in Slovenia would see troika coming as an outside leverage for a structural endogenous change in the rentier and elite system, but except for Ireland, troika’s assistance in Greece and Portugal has as main results depression and unemployment, higher debt ratio and political and social turmoil. Troika coming is worth if you balance the trade offs?
I would, as much as possible, try to avoid the troika scenario for Slovenia, since it means losing the economic sovereignty. It can take a decade before a country can mitigate the negative collateral damages in the form of economic depression and increased unemployment. So far the outside pressure delivered by the fear of troika seems to work and to have a diciplining effect on the government. But not necessarily on all coallition partners and not necessarily on all social partners. I would rather see that European Commission and ECB set up a pre-troika team for Slovenia providing the lacking technical expertise and ensuring the tranparency and efficiency of the banking and corporate restructuring. Of course, a credible reform program to be confirmed by Brussels is needed first.
How do you evaluate the economic policy of the new government?
There was not much to be seen from new government regarding the economic policy yet. There were some statements, but it was all pretty messy and inconsistent. Two weeks ago, a new NRP (National Reform Program), that is required by the EU Commission every year, has been made public. However, most of the NRP consists of the measures prepared already by the previous administration. There are only some slight hints to the possible economic policy of the new government included. These are:
- increase in taxes (VAT, excise taxes, social contributions, a sort of a new ‘crisis tax’),
- change of the bad bank law (not all bad assets to be transferred to the BAMC, no need for scheduled privatization of acquired capital stakes in firms with non-performing loans (the current law foresees that each year 10% of the acquired stakes have to be privatized),
- plan on deleveraging of highly indebted firms that should run parallely with the bank rehabilitation (no clear idea, but most likely the government may issue guarantees for debt of private firms).
Regarding the latter two, the EU Commission has already unofficially stated that it violates the transparency of the bail-out process and the EU regulation on state aid. So this plan might well not be acceptable for the Commission. There is no clear plan yet on privatization of large firms (Telekom, Triglav, Petrol, banks). We should get further insights this Thursday when government will announce the stability program to be sent to Brussels.
* In response to questions by Jorge Nascimento Rodrigues, Senior Contributor for Expresso (www.expresso.pt), weekly newspaper in Portugal, and author in management and economic history books