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30 April 2013

Bloomberg: Slovenia bank rescue costing 20 per cent of GDP means no escaping EU aid


Slovenia, the first former Communist nation in the eurozone, is facing a typically capitalist dilemma: whether to protect creditors of big banks.

Rising loan losses resulting from a housing bust and a second recession in two years have left a hole of about €7.5 billion ($9.8 billion) at Slovenia-based lenders.

According to Raoul Ruparel, head of research at London-based Open Europe, the country may need assistance from the European Union, and holders of bank bonds, including the most senior creditors, could be forced to take losses. “It’s not impossible, but it’s very unlikely that Slovenia can manage to pull off the bank restructuring without any EU money”, said Ruparel, who tracks economic and political developments in the region. “And when it turns to official funds, the conditions will most likely include a bail-in of creditors, especially because banks are the main problem.”

Slovenia is trying to avoid following Cyprus as the sixth country using the euro to require a bailout. The government has injected about €1 billion into Slovenia’s three largest banks since 2008, according to data compiled by Andraz Grahek, a managing partner at Capital Genetics, a financial-advisory firm in Ljubljana, Slovenia. The country’s lenders will need an additional €900 million by the end of July.

The EU aid package might have to be about €8 billion because the government needs to finance a widening budget deficit as well as bank restructuring, estimates Mai Doan, a London-based economist at Bank of America Merrill Lynch. The Organisation for Economic Co-operation and Development has criticised the government’s €900 million figure as too low and urged some costs to be borne by owners of bank debt.

“The government continues to emphasise it won’t request a bailout, but the pipeline of potential debt issuance in the coming year is quite large”, Doan said. “Investors would like to have a backstop from the EU to comfortably invest in Slovenia’s bank restructuring. The government will resist an EU package until it’s pushed to do it by markets, when yields rise to unsustainable levels.”

Slovenia, a nation of 2 million people that accounts for 4 per cent of the eurozone’s economic output, joined the monetary union in 2007. Now its membership may require it to impose losses on senior bank creditors, as Germany leads a chorus advocating such burden-sharing in restructuring costs.

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