* More painful spending cuts ahead
* Slovenia trying to remake economy having avoided bailout
* Bond yields near lowest since joining euro in 2007
By Marja Novak
LJUBLJANA, April 3 Slovenia has dodged an
international bailout, recapitalised state-owned banks on its
own and already raised enough money on the bond market to cover
its spending needs for this year.
The first ex-Yugoslav republic to join the euro zone is also
addressing its hefty government bond obligations, taking
advantage of returning investor confidence to offer alternative
repayment options that will be easier for the government to
But the simultaneous announcement of a planned 5 percent cut
in the public sector wage bill hints at the pain yet to come as
Slovenia remakes an economy still 50-percent controlled by the
"The government will not be able to remain idle, as the
European Commission and investors are closely following what is
happening in Slovenia and pressing for reforms," said Primoz
Cencelj of investment fund KD Skladi, forecasting another
financial crisis in 2015 if measures taken now aren't tough
Crony capitalism blossomed during Slovenia's export boom
years after euro entry in 2007, leaving a trail of bad debts
that the government managed to clean up in December without
outside help, pumping 3.3 billion euros ($4.5 billion) into
mainly state-owned banks.
But the bad loan portfolio still stands at 11 billion euros,
31 percent of annual national output - a level central bank
governor Bostjan Jazbec described last month as "worrisome".
Tuesday's bond issue, totaling 2 billion euros, means
Slovenia has secured its funding needs for the short run.
It "should enable Slovenia to avoid a bailout and remain in
charge of its own destiny," said Timothy Ash, head of emerging
market research at Standard Bank.
But with the economy - by the most optimistic forecasts -
expected to grow just 0.5 percent this year, the disparate
coalition government cannot afford to shirk painful spending
cuts or state sell-offs.
Around a third of Slovenia's 24 billion euros of outstanding
debt falls due over the next three years, Reuters data shows,
with a hefty 4 billion euros - 11 percent of gross domestic
product (GDP) - due to be redeemed in 2016 alone.
Alenka Bratusek's government had already cut public sector
wages by about 2.5 percent in 2013 when it announced plans for a
further cut of 5 percent in 2015. It has transferred banks' bad
loans into a 'bad bank' and the banks are cutting jobs, branches
and other costs.
Only two of the 15 state-controlled companies slated for
privatisation have been sold so far.
But more sales are expected this year. On Wednesday,
Slovenia called for bids for telecoms firm Telekom Slovenia
, the most valuable of the 15..
Slovenia hopes the sales will not just top up budget
revenues, but also improve corporate governance and shut down
room for corruption after years of mismanagement and
politically-motivated lending by the big banks.
"Privatisation is necessary for politics to move out of the
economy and make companies more effective," said Saso Stanovnik,
chief economist at investment firm Alta Invest.
The finance ministry is proposing to increase VAT
(value-added tax) to 24 from 22 percent for eight months from
May 1, to make up for a court decision on Friday striking down a
proposed real estate tax worth an estimated 126 million euros
However, the government coalition of four parties with clear
policy differences has not agreed the VAT increase yet.
It is also under pressure to further rein in public spending
and tackle the grey economy. With the bank recapitalisation, the
budget deficit soared to 14.7 percent of gross domestic product
last year. The government is targeting 4.2 percent this year.
In a sign of market confidence, the yields on Tuesday's
issue stood at 1.75 percent for the 3.5 year bond and 3 percent
for the 7-year bond, well below the 4.7 percent Slovenia had to
pay on its last euro-denominated 3-year bond issued in November.
About 4.5 billion euros in bad loans are planned to be
transferred to the 'bad bank' to clean up banks for eventual
sale. Some analysts said more bad loans might have to be
transferred, but the recapitalisation seems to have worked, for
"Domestic banks still have a large proportion of bad loans
but that will be gradually reduced as transfers to the bad bank
progress," said Matej Simnic, bank analyst at Alta Invest.
"I don't expect another bank bailout will be needed."
($1 = 0.7263 Euros)
(Reporting by Marja Novak; Editing by Ruth Pitchford)