Slovenia May Need $10B Bailout, Haircuts a Possibility: BAML

Slovenia May Need $10B Bailout, Haircuts a Possibility: BAML

Slovenia May Need $10B Bailout, Haircuts a Possibility: BAML

Slovenia is now in focus after the ‘botched’ bailout of Cyprus. Unfortunately, things are not looking great in Slovenia right now. BAML thinks that the country could require a bailout just shy of the original $13 billion bailout planned for Cyprus, and that haircuts on deposits cannot be ruled out.

Economic headwinds

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Economic prospects look poor due to global developments and structural constraints. BAML expects another year of recession, with GDP growth at -2% in 2013 from -2.3% in 2012. A weak banking sector with rapidly deteriorating credit quality hinders credit extension, contraction of consumption, rising unemployment and fiscal consolidation are all areas of concern. Finally, headwinds are exacerbated by the difficult situations in Slovenia’s key trading partners (Italy, Croatia, Hungary and Serbia – the weaker links in Europe – are in the top 10).

Bad bank plan

PM Bratusek’s government, which has been in place since 20 March, pledges to continue fiscal consolidation and banking sector reforms approved by the previous administration, including the bad bank plan (Bank Asset Management Company – BAMC). However, little has been announced so far other than plans to have the BAMC functioning by September. The previous cabinet planned €4bn of financing for the BAMC via government guaranteed bonds.

GDP to debt expected to skyrocket

The general government debt to GDP ratio likely stood at below 55% in 2012, according to European Commission and IMF forecasts. With €4bn of financing for the BAMC, BAMl estimates that the debt stock will be 70% of GDP in 2013.

Time is not on Slovenia’s side…

Slovenia has to tap the market before June, when €0.9bn of T-bill redemptions are due and banking recapitalization of €1bn is likely needed.

Slovenia has one of the most adverse pension expenditure dynamics in the Eurozone, with a 6.5% of GDP increase in pension spending expected between 2015 and 2055 and an almost exclusive pay-as-you-go pension system.

Political Risks

Political risks remain high, especially if unpopular fiscal consolidation leads to fiercer social protests. PM Bratusek’s government – formed after a successful no confidence vote in the ex-PM Janez Jansa – consists of the senior ruling Positive Slovenia (PS), Social Democrats (SD), and two parties belonging to the previous administration, Civic List (DL) and Democratic Party of Pensioners (DeSUS).

PS and some trade unions called for a referendum against the BAMC in November 2012. Many lawmakers in the junior ruling partners have also expressed the view that elections should be held in 2014, ahead of the 2015 schedule. Meanwhile, the government’s austerity measures and corruption scandals since 2012 have led to the largest wave of protests since independence in 1991, posing challenges for the new cabinet to consolidate public finances.

Meaningful risks of bailout, €6-8bn package possible

Challenges not only in the banking sector but also public finances and competitiveness imply meaningful risks of an international bailout this year. BAML estimates the size of a bailout package may be €6-8bn, including budget financing. BAML states “the smaller scale of the banking sector relative to GDP makes a Cyprus solution of haircutting large depositors unlikely, but it cannot be discounted entirely due to the limited potential contribution from senior debt securities on banks’ balance sheet” and the underfunded pension system.

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