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Could Slovenia Beat Spain to Be Europe’s 6th Bailout?

Tuesday, 25 Sep 2012 | 10:24 AM ET

While financial markets remain focused on Spain, analysts are touting ex-Yugoslav Slovenia as another candidate to tap the euro zone’s new bailout fund, the European Stability Mechanism (ESM).

The 'Europe' sculpture by Belgian artist May Claerhout, showing a woman holding up the symbol of the Euro, stands outside the European Parliament building on November 22, 2011 in Brussels, Belgium.
Adam Berry | Getty Images
The 'Europe' sculpture by Belgian artist May Claerhout, showing a woman holding up the symbol of the Euro, stands outside the European Parliament building on November 22, 2011 in Brussels, Belgium.

In common with Spain, Slovenia experienced a real estate boom that burst when the global economic crisis struck in 2008, leaving Slovene banks sitting on billions of bad loans.

“It’s very right to draw the parallel between Spain and Slovenia,” said William Jackson, an emerging market economist at London research firm Capital Economics. “They both experienced rapid credit growth in the pre-crisis years, and are now sitting on bad assets in terms of real estate and unproductive investments.”

Like Spain, Slovenia moved last week to establish a state-run “bad bank” to isolate rotten assets and clean up its banking sector.

Analysts are concerned however that repeated efforts to shore up the banking sector with public money could push Slovenia’s debt to unsustainable levels.

Slovene Finance Minister Janez Sustersic warned last week that banks could require up to 1 billion euros ($1.3 billion) to recapitalize if their assets are transferred to the bad bank at a discount. This could be an underestimation however, with Capital Economics’s Jackson believing recapitalization could require as much as 5 billion euros .

Impact on Sovereign Debt

Credit ratings agency Moody’s forecasts Slovenia’s debt-to-GDP ratio will rise in 2012, but remain low at 53.6 percent. Nonetheless, analysts are concerned that bolstering banks with government funds could still impede efforts to manage public debt.

“Bank recapitalization with government funds aggravates the task of turning around public debt dynamics, which eventually could prove a challenge, even in Slovenia where public debt is still at relatively low levels,” Thomas Harjes, director of European economic research at Barclays, said in a note.

“If repeated infusions of public capital threatened to push sovereign debt to unsustainable levels — a real threat for small member states with large banking sectors — a bank liability management exercise (with burden sharing by shareholders and creditors) and/or external aid, could become necessary,” he said.

However, Jackson said a Slovene bailout was more likely to be forced by a rise in broader euro zone risk aversion, making it prohibitively expensive for Slovenia to borrow to refinance its debt.

Bond yields are already very high, with 10-year Slovene notes yielding 6.5 percent last week. If bond yields escalate once again the euro zone, risk aversion could spike, making it even more difficult for Slovenia to borrow,” he said.

Irrespective, Slovenia’s small economy means a Slovene bailout is unlikely to provoke market turmoil on the scale of a Spanish request for aid.

“If by any chance Slovenia has to ask for a bailout, it would not pose any problems for the EU,” said Joze Damijan, an economist at the Institute for Economic Research in the Slovene capital of Ljubljana.

“Slovenia’s total public debt is around 16 billion euros, with a yearly requirement to refinance about 3 billion euros of outstanding debt. These are miniscule figures compared to any of the other EU countries.”

— By CNBC.com's Katy Barnato

Contact Europe: Economy

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