Pain catches up with Slovenia as banks finally face post-Communist era

Mon Dec 9, 2013 11:08am EST

* Bank stress results expected Thursday

* Government expects to escape EU/IMF bailout

* Junior bondholders face "haircut"

* Slovenians see more pain to come

By Maja Zuvela

LJUBLJANA, Dec 9 (Reuters) - Boris Jazbec's fortunes have for years followed those of his country. As euro zone membership boosted Slovenia's exports and papered over its Communist past, he went into business and his investments prospered.

In 2010, he sold a chunk of prize real estate to buy into a government offer to invest in state-owned banks.

"I thought: If this bank were to go bankrupt, it would be the end of Slovenia as well," Jazbec told Reuters.

Now he is among thousands of junior bondholders who risk losing millions as Slovenia races to recapitalise banks that are drowning in some 7.9 billion euros ($10.8 billion) in bad loans, threatening to drag Slovenia into the bailout queue.

Jazbec's exposure will become clearer this week - probably on Thursday - when the results of an external audit will determine how much the banks need.

Desperate to avoid following Greece, Ireland, Portugal and Cyprus in seeking international aid, Prime Minister Alenka Bratusek hopes to escape the tough terms and intensive monitoring of a bailout by considering a "haircut" of junior creditors to help the raise the cash.

Though the money involved is small change compared with the more than 200 billion euros poured into Greece, the euro zone, too, wants to avoid another call on the bloc's taxpayers. It also fears yet more complaints that cost-cutting is ruining the job prospects of Europe's youth.

Officials and analysts expect the banks will need an injection of between 4 and 5 billion euros. Most analysts and the government itself believe it can plug that gap by inflicting losses on the small bondholders, using its own cash reserves and, if necessary, tapping financial markets.

But there is little sign of relief among Slovenia's 2 million people, who in 1991 made an early exit from disintegrating Yugoslavia to fast-track into the European Union in 2004 and the euro zone in 2007.

That year, Slovenia's was the bloc's fastest growing economy. Then the global crisis struck, exposing a country still largely stuck in Communism, with the government controlling around half the economy and state-owned banks doling out loans to the politically well-connected.

'PLANE CRASH'

"After independence I felt so proud of being Slovenian," said Jazbec, now 57. He started out at a state-run food-packaging company, which he then bought, and subsequently began buying, renovating and renting out office space. He sold 600 square metres (6,500 square feet) to buy the NLB bonds.

"Everything seemed so bright. But now I feel like we're in a plane that has run out of gas and it's a matter of seconds before it crashes," he said. "And all this just because of an incestuous marriage between the state and banks."

Bondholders like Jazbec face losing an estimated 500 million euros. They number in the thousands, but Rajko Stankovic, the head of an association of local small shareholders, said the bail-in could indirectly affect half a million people, or 1 in 4 Slovenians.

NLB alone could need around 1.5 billion euros in fresh capital, Slovenia's business daily Finance reported last week.

Stankovic said more than 900 people, mostly elderly, had bought the bank's junior bonds, with a yield at the time of 6.25 percent compared to interest of 2-3 percent on regular savings.

"Banks should have been conservative institutions but they extended loans with little collateral insurance and now we have to carry the burden. That's not fair," said Stankovic, mentioning the possibility of seeking protection in international courts.

Unlike in Cyprus, where the government bailed in big depositors to find the cash demanded by the European Union and International Monetary Fund as a condition of extending aid, the savings of ordinary Slovenians will not be touched.

But they are already feeling the effects of government spending cuts and a second recession since 2008. The retirement age has gone up and public sector wages have gone down. Unemployment stands at over 12 percent.

There are plans to reform the labour market to make hiring and firing easier, and the government has slated 15 state firms for sale, including the national airline, airport and telecom provider.

DEPOSIT DRAIN

"I've never been this worried since (Slovenia declared) independence," said a 30-year-old teacher in Ljubljana who gave her name as Katarina. "Now I see how they're cutting funds in the healthcare system, they're even closing some wards in the hospital because they are struggling financially."

Slovenia's plight grabbed headlines over the past two years as protesters began taking to the streets, but their anger was directed more at high-level corruption than economic woes.

Analysts see little chance of Athens-style unrest in this sleepy Alpine country, squeezed between fellow EU members Austria, Italy and ex-Yugoslav Croatia.

But Slovenians have been shocked by their turnaround in fortunes and distrust central bank assurances that all commercial banks will be open for normal business despite the stress tests.

"Money is currently not safe in our banks," said Rok Mursic, a 23-year-old salesman in the capital. "I was thinking of opening an account in a foreign bank."

Deposits at NLB have already fallen nine percent in the first nine months of this year.

Bratusek was in Milan on Monday, following recent trips to France and Germany to shore up confidence and find possible investors. She travels to Moscow on Tuesday. If Slovenia can scrape through, it will be a victory for Bratusek after nine months in office. But much damage has already been done.

"Even if the state manages to recapitalise the banks, their reputation will be ruined for good," said Stankovic of the small bondholders' association. "Citizens are losing confidence in the banking sector and that's the capital punishment for the banks, even if they stay afloat."

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.