Slovenia eyes political stability, but probably more debt

Mon Jul 14, 2014 8:34am EDT

* Election winner hostile to big-ticket privatisations

* Political novice crowns astonishing rise to power

* Government may pile on more debt

By Marja Novak

LJUBLJANA, July 14 (Reuters) - The sudden rise to power of political novice Miro Cerar may give Slovenia the stability it needs to revive its economy but his reluctance to sell big state assets could pile up the debt that worries its euro zone peers.

Cerar, a 50-year-old legal expert who entered politics just six weeks ago, will command more than a third of seats in Slovenia's parliament, more than any other ruling party in just over two decades of independence.

Market reaction on Monday was mixed, reflecting a potential trade-off between the political clarity that has long been lacking, and Cerar's hostility to selling strategic assets - notably telecom operator Telekom Slovenia and airport Aerodrom Ljubljana.

Slovenia only narrowly avoided having to seek an international bailout for its banks late last year, after exports hit a wall with the onset of the global crisis and bad loans soared.

Cerar told Reuters on Sunday he would begin coalition talks in the next few days, looking to several smaller centre-left parties that share his antipathy for some of the harshest austerity measures agreed under the previous government.

He will form Slovenia's fourth government since 2008, when the crisis exposed a toxic mix of politics and finance in the former Yugoslav republic, whose economy is still 50-percent controlled by the state.

"Cerar's election could improve political stability and political accountability. He seems to understand that Slovenia needs transformation, changing the way the country does business, which is encouraging," said Timothy Ash, head of emerging market research at the Standard Bank.

He said Cerar would not back "any cheap sale of the family silver, and hence for 2015 and beyond there will be increased reliance on debt issuance".

But at around 70-80 percent of national output, Slovenia's debt/gross domestic product ratio "will remain around 10-15 percentage points below the EU average for this year and next", he said.

DEFICIT COVERED THIS YEAR

After winning 36 of parliament's 90 seats, Cerar told Reuters his centre-left party would meet deficit targets agreed with the European Union, but Slovenia would seek "our own ways" to get there. His cabinet, he said, would review which state companies would be sold.

The privatisation process was suspended this month pending the formation of a new government, which is not expected before mid-September.

Asked whether his government would take on new debt this year, Cerar said: "That is possible, but we need to get a clear and detailed picture of public finances first."

Telekom shares fell by 1.49 percent to 125.5 euros in the first hour of Monday trading, pushing the blue-chip SBI index down by 1.15 percent. They have since regained ground.

"I expect privatisation will continue but it is possible that the Telekom sale will be stopped ,which would reflect negatively on the Slovenian share market and on the sovereign bond yields," said Iztok Trobec, a trader in the treasury department of Dezelna Banka.

The yield on Slovenia's 10-year benchmark bond eased, however, to 3.252 percent from 3.378 percent on Friday, in line with yields of other vulnerable euro zone debtors, as market worries about Portugal's biggest listed lender eased.

By issuing bonds worth 4.5 billion euros, Slovenia has already covered its budget deficit for this year and part of 2015 so the country has no urgent financial needs. No major privatisation proceeds were expected this year.

The European Commission expects Slovenia's economy to grow by 0.8 percent this year after two consecutive years of recession.

But the country of 2 million people must bring its budget deficit down to 4.2 percent of GDP from more almost 15 percent last year, when it soared because of bank recapitalisation, and to 3 percent next year. (Writing by Zoran Radosavljevic; Editing by Matt Robinson/Ruth Pitchford)

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