Slovenia reaching 'tipping point' as bailout looms
Fears that struggling euro zone country Slovenia are closer to asking for an international bailout re-emerged this week with lawmakers warning that the country might soon not be able to fund itself.
The central European state, formally a part of Yugoslavia, joined the 17-country euro zone in 2007. After being hit with a real estate crash in the financial crisis, the country is struggling with state-owned banks saddled with unhealthy amounts of non-performing loans and an economy overreliant on exports to the rest of the continent.
After surviving bailout scares in April by tapping the bond markets, the same fears have now returned with central bank Governor Bostjan Jazbec telling reporters on Wednesday that Slovenia would look to request financial assistance from its European partners if sovereign debt yields are pushed any higher.
Premier Alenka Bratusek has so far been determined for the country to solve its own problems but told parliament on Wednesday that the "biggest unknown" was how much extra capital the government would need to pump into the banks.
Analysts watching developments in the country predict that the banking sector would need between 2-5 billion euros ($2.7-$6.8 billion), said Timothy Ash, the head of emerging market research at Standard Bank, who has just returned from Slovenia's capital Ljubljana. However, the government currently has only 3 billion euros on its cash balance, and predicts it will need a bailout of around 1.2-1.5 billion euros.
The margins between these amounts are set to come to the fore with stress tests being performed at the end of November.
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"I think they can probably cover bank recapitalization costs of 2 billion euros, beyond that they might need a bailout," Ash told CNBC, adding that it also depends if the government reaches out to the markets before then.
Finance Minister Uros Cufer told public broadcaster TV Slovenija last Thursday that Slovenia is planning to tap the international money markets to cover the 3 billion in loans due in 2014. While Cufer remains defiant that Slovenia will sort its own problems out, the same can't be said for Interior Minister Gregor Virant. According to the STA agency, he told reporters on Monday that a loan from the euro zone's bailout fund, the European Stability Mechanism, could be the cheapest way to inject much-needed funds into the banking sector, which still has an estimated 7.9 billion euros of bad loans on their books.
Yields on Slovenia's 10-year benchmark bond stood at 6.75 percent on Wednesday, after starting the year at 5.784 percent. Current levels aren't far off the interest rates reached back in early April when contagion from the crisis in Cyprus meant yields ticked above the 7 percent mark.
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For the time being, Slovenia has been able to maintain market access, according to Nick Spiro, head of Spiro Sovereign Strategy. But he added there's a significant risk of a "liquidity crisis" given how much the government needs to raise to shore up the banks.
"This is what could force Slovenia to request foreign aid," Spiro told CNBC. "A long-standing aversion to structural reform and foreign investment has taken its toll on Slovenia's economy and created a vicious circle in which corporate and banking sector distress, weak public finances and a severe recession are all feeding on each other. The euro zone crisis is tipping Slovenia over the edge."
—By CNBC.com's Matt Clinch; Follow him on Twitter @mattclinch81