(Replaces dollar and euro currency symbols with USD and EUR)
* Sovereign bonds under pressure
* Comparisons with Cyprus unwarranted
* Country could still have access to capital markets
* Government to establish internal 'bad banks'
By Davide Scigliuzzo
LONDON, March 28 (IFR) - Slovenia has been thrown into the
spotlight as the next eurozone country likely to seek an
international bailout, given the fragile state of its banking
Following the bailout/bail-in farce in Cyprus, Slovenia's
dollar bonds have dropped by nine points over the past two weeks
as investors worry about the Balkan country's troubled banking
sector and the government's ability to tap the international
While the government insists that Slovenia will be able to
get through the crisis under its own steam, a deal with
international lenders could provide a key backstop to fears of
contagion, say analysts.
"Slovenia is now inevitably heading to a bailout, the
eurozone shot itself completely in the foot following the Cyprus
issue," said Tim Ash, head of EM research ex-Africa at Standard
But while there is no denial among market participants that
Slovenia's banking crisis is acute, most observers agree that a
comparison with Cyprus is unwarranted.
Slovenia's banking sector assets account for 130% of the
country's GDP, compared with 800% in Cyprus, and the Balkan
state's debt-to-GDP ratio stood at 54% as of the end of 2012,
which is relatively low compared with a EU average of 80%.
Nonetheless, with or without the IMF, analysts believe
Slovenia needs to quickly push forward a policy mix comprising
fiscal tightening, privatisations and a recapitalisation of its
largely state-owned banking sector if it is to stay afloat.
Pressure on the country is undoubtedly mounting, as
reflected by the dismal performance of its sovereign bonds. The
yield on the country's 2022 US dollar notes has widened by 120bp
over the past two weeks, jumping by a jaw-dropping 80bp on
Wednesday alone, to reach 6.2%.
Key from this perspective is whether the sovereign will be
able to maintain access to the international capital markets
over the next two to three months, as EUR1bn of T-bills come due
According to the IMF, Slovenia's financing needs for 2013
amount to more than EUR3bn, a large portion of which will have
to be funded externally given local banks' inability to absorb
large amounts of government debt.
The sovereign's issue of USD2.25bn of 10-year bonds towards
the end of last year helped pre-finance about EUR1.6bn of this
year's requirement, according to Gillian Edgeworth, chief EEMEA
economist at UniCredit. The doors of the international capital
market, however, are not shut yet, say bankers who cover the
"There is a pocket of interest [among investors], so an
international bond issue could work, but they would have to pay
up massively," said an origination official. "They would need
some tailwind as well."
The government might also need to target US dollars, rather
than euros. "In euros no way," said a second banker. "US dollar
investors are used to volatility. They definitely still have
access to US dollars."
The bond market came to Slovenia's rescue in October when
the issuance of the 2022 notes, its debut US dollar offering,
averted the need for an international bailout. At the time,
however, credit conditions looked more favourable for the Balkan
state, following the pledge by ECB president Mario Draghi to do
"whatever it takes" to save the eurozone.
While that pledge remains, Eurozone policymakers' handling
of the situation in Cyprus, together with comments from a senior
official that the bailout there could become a template for
others, although later retracted, have unnerved investors.
"Market momentum is moving against Slovenia, and quick,"
said Ash. "It will be tough and expensive for them to put a new
issue to bed without significant backstopping from the Troika."
In a sign that appetite for Slovene credit had not
disappeared yet, state-owned export and development bank SID
Banka last week successfully raised EUR200m through a private
placement of three-year senior bonds.
The notes, which are guaranteed by the state, were priced at
an interest rate of 3.2% over three-month Euribor.
EYEING BAD BANK SOLUTION
Part of the uncertainty still surrounding the country is due
to adjustments that the new governing coalition - led by Prime
Minister Alenka Bratusek - has pledged to make to the original
'bad bank' proposal put forward by the previous Janez Jansa
One of the key tweaks now under consideration, according to
RBS, is the creation of internal bad banks within each of the
country's largest financial lenders, postponing any transfer of
toxic assets to an external bank asset management company to a
"Initially, bad assets would be transferred to the internal
bad banks and backed simply by government guarantees," said
Abbas Ameli-Renani, an emerging market strategist at RBS.
Under the original proposal, assets would have been
transferred immediately to the BAMC in exchange for newly-issued
While there will be a simultaneous recapitalisation of banks
under both arrangements, the new version would not result in an
immediate spike in the government's debt level, because the
authorities would initially provide banks with guarantees rather
than newly issued securities.
One of the downsides, however, is that the plan will keep
bad assets on banks' balance sheets and under the same
(Reporting by Davide Scigliuzzo; Editing by Sudip Roy and