Slovenian bond issue throws spotlight on promised reforms

by Reuters
Thursday, 3 April 2014 12:25 GMT

* More painful spending cuts ahead

* Slovenia trying to remake economy having avoided bailout

* Bond yields near lowest since joining euro in 2007

By Marja Novak

LJUBLJANA, April 3 (Reuters) - Slovenia has dodged an international bailout, recapitalised state-owned banks on its own and already raised enough money on the bond market to cover its spending needs for this year.

The first ex-Yugoslav republic to join the euro zone is also addressing its hefty government bond obligations, taking advantage of returning investor confidence to offer alternative repayment options that will be easier for the government to manage.

But the simultaneous announcement of a planned 5 percent cut in the public sector wage bill hints at the pain yet to come as Slovenia remakes an economy still 50-percent controlled by the state.

"The government will not be able to remain idle, as the European Commission and investors are closely following what is happening in Slovenia and pressing for reforms," said Primoz Cencelj of investment fund KD Skladi, forecasting another financial crisis in 2015 if measures taken now aren't tough enough.

Crony capitalism blossomed during Slovenia's export boom years after euro entry in 2007, leaving a trail of bad debts that the government managed to clean up in December without outside help, pumping 3.3 billion euros ($4.5 billion) into mainly state-owned banks.

But the bad loan portfolio still stands at 11 billion euros, 31 percent of annual national output - a level central bank governor Bostjan Jazbec described last month as "worrisome".

Tuesday's bond issue, totaling 2 billion euros, means Slovenia has secured its funding needs for the short run.

It "should enable Slovenia to avoid a bailout and remain in charge of its own destiny," said Timothy Ash, head of emerging market research at Standard Bank.

But with the economy - by the most optimistic forecasts - expected to grow just 0.5 percent this year, the disparate coalition government cannot afford to shirk painful spending cuts or state sell-offs.

Around a third of Slovenia's 24 billion euros of outstanding debt falls due over the next three years, Reuters data shows, with a hefty 4 billion euros - 11 percent of gross domestic product (GDP) - due to be redeemed in 2016 alone.


Alenka Bratusek's government had already cut public sector wages by about 2.5 percent in 2013 when it announced plans for a further cut of 5 percent in 2015. It has transferred banks' bad loans into a 'bad bank' and the banks are cutting jobs, branches and other costs.

Only two of the 15 state-controlled companies slated for privatisation have been sold so far.

But more sales are expected this year. On Wednesday, Slovenia called for bids for telecoms firm Telekom Slovenia , the most valuable of the 15..

Slovenia hopes the sales will not just top up budget revenues, but also improve corporate governance and shut down room for corruption after years of mismanagement and politically-motivated lending by the big banks.

"Privatisation is necessary for politics to move out of the economy and make companies more effective," said Saso Stanovnik, chief economist at investment firm Alta Invest.

The finance ministry is proposing to increase VAT (value-added tax) to 24 from 22 percent for eight months from May 1, to make up for a court decision on Friday striking down a proposed real estate tax worth an estimated 126 million euros per year.

However, the government coalition of four parties with clear policy differences has not agreed the VAT increase yet.

It is also under pressure to further rein in public spending and tackle the grey economy. With the bank recapitalisation, the budget deficit soared to 14.7 percent of gross domestic product last year. The government is targeting 4.2 percent this year.

In a sign of market confidence, the yields on Tuesday's issue stood at 1.75 percent for the 3.5 year bond and 3 percent for the 7-year bond, well below the 4.7 percent Slovenia had to pay on its last euro-denominated 3-year bond issued in November.

About 4.5 billion euros in bad loans are planned to be transferred to the 'bad bank' to clean up banks for eventual sale. Some analysts said more bad loans might have to be transferred, but the recapitalisation seems to have worked, for now.

"Domestic banks still have a large proportion of bad loans but that will be gradually reduced as transfers to the bad bank progress," said Matej Simnic, bank analyst at Alta Invest.

"I don't expect another bank bailout will be needed." ($1 = 0.7263 Euros) (Reporting by Marja Novak; Editing by Ruth Pitchford)

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