Slovenia pledge to continue austerity
Slovenia's pledge to continue austerity measures failed to stem a rise in bond yields to record highs as investors worry the Alpine nation will follow Cyprus as the next euro-region member requiring a bailout.
Prime Minister Alenka Bratusek, in her first major policy speech since taking office, told Parliament yesterday that her week-old government would rebuild ailing banks and improve state finances that are in "bad shape" so the country won't become the sixth euro member to need aid. European Union officials are striving to contain a debt crisis that prompted Cyprus to join Greece, Portugal, Ireland and Spain in agreeing on a bailout. Bratusek's lack of specifics on how to avoid foreign support helped push the country's benchmark dollar-denominated bonds to an all-time high at a time when Slovenia is looking to tap bond markets.
"Developments in Cyprus have translated into concerns that Slovenia will struggle to access the Eurobond market over the coming months as it moves to recapitalize its banking sector and shift reliance for budget financing away from the domestic banking sector, with an increased risk of a haircut in deposits," Gillian Edgeworth, chief economist at UniCredit SpA (UCG) in London, wrote in a note to clients yesterday.
Slovenia's economy has struggled with two recessions over the past four years, boosting bankruptcies. Banks such as Nova Ljubljanska Banka d.d. are struggling with surging bad loans after the collapse of the construction industry, which fueled growth before the crisis. Bad loans account for about a fifth of economic output, sparking fears it may be next to seek help.
Slovenia needs about 3 billion euros of funding this year, while banks need an additional 1 billion euros of fresh capital, the Washington-based IMF said last week. The previous government of Janez Jansa, which fell Feb. 27 amid a corruption scandal, had proposed a 4 billion-euro plan to deal with bad assets at financial institutions that Bratusek pledged to follow with some unspecified changes. "Slovenia won't need aid, we can do this on our own," Bratusek said yesterday. "Our banking system is stable and safe and comparisons with Cyprus aren't valid.