Slovenia banking debts raise fears of EU bailout

http://www.theguardian.com/world/2013/dec/12/slovenia-banking-debts-fears-eu-bailout

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Slovenia put the EU on red alert on Thursday following a warning that its ailing banking sector needs to raise reserves by €4.8bn (£4bn) to meet capital targets.

In the wake of an audit of the country's major lenders, central bank governor Bostjan Jazbec said the capital was needed to cover bad loans built up since the financial crisis.

He said the shortfall could be covered without a bailout by Brussels, but some analysts said the country's limited cash pile and the difficulties of tapping private sector sources in the midst of a severe recession meant an EU rescue was still likely.

Slovenian banks are saddled with an estimated €8bn in bad loans –more than a fifth of national output – after the financial crisis crippled exporters and exposed the lack of reforms since the ex-Communist country joined the EU.

Jazbec said the three biggest Slovenian banks, all wholly or partially state-owned, would need around €3bn in extra capital from the government.

The central bank plans to impose 100% losses on junior bondholders to reap some €440m.

The rest may come from gains as the banks transfer assets to a bad bank. He said five smaller banks would be given until June 2014 to raise around €1.1bn from private capital.

"There is no concern or need to doubt these results," Jazbec told a news conference. A government statement said the recapitalisation would ensure "a way out of the crisis".

The European Union accepted Jazbec's assurances that Slovenia would deal with the problem independently.

EU economic and monetary affairs commissioner Olli Rehn said: "Today it is clear that Slovenia can proceed with the repair of its financial sector without turning to her European partners for financial assistance."

Yet Igor Masten, associate professor of economics at the University of Ljubljana told Reuters: "It is hard to see what the total cost is. There is much more they will have to clarify."

Prime minister Alenka Bratušek said earlier this month that the nation has built up a €5bn cash cushion to cover the costs following the sale of €1.5bn of bonds in a private placement in November.

At the time the left of centre government played down the need for even a €4.6bn rescue of the banking sector, saying it was exaggerated.

Her government is under pressure to stabilise the economy, which is mired in recession and coping with an unemployment rate in excess of 12%.

The crisis represents a dramatic fall from grace for Slovenia, an ex-Yugoslav republic of 2 million people that for years was viewed as a haven of stability and economic health.

While the rest of Yugoslavia imploded in war in the 1990s, Slovenia took a fast-track to membership of the EU in 2004 and the eurozone in 2007.

A fire sale of national assets once considered sacrosanct is set to ensue. They include No. 2 lender Nova KBM, Telekom Slovenia, flag carrier Adria Airways and Ljubljana international airport.

Timothy Ash, head of emerging markets research at Standard Bank, backed the stress test results, saying they arrived at a credible number. He said: "The market will be relieved that it is on the table now, and realistic."

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