By Michael Winfrey and Marja Novak
LJUBLJANA, April 9 Slovenia's struggle to avoid
joining the euro zone bailout line intensified on Tuesday after
the OECD said the country may have underestimated the cost of
cleaning up its banks and a debt auction went awry.
Following last month's messy rescue of Cyprus, the country
of 2 million perched on Italy's northeast border is seeking
funds to heal its state-owned financial sector and has come
under increasing pressure from markets.
Slovenia is not in immediate need of rescue, said Yves
Leterme, deputy secretary general for the Organisation for
Economic Cooperation and Development.
But in a damning economic survey, the Paris-based
organisation said the country faces "risks of a prolonged
downturn and constrained access to financial markets."
"The government of this country has been able to meet its
financial needs without difficulties so far," Leterme said in
Ljubljana while presenting a survey that assessed Slovenia's
economic outlook as one of the worst in the OECD.
"It (borrowing) was at a relatively high cost (but) as far
as we are concerned, there is no reason to anticipate an
immediate need for a bailout," he said.
The first country to break away from the former Yugoslavia
in the 1990s, Slovenia is the only ex-communist European Union
state that had declined to privatise most of its banking sector.
The OECD, a 34-member club of developed economies, said
Slovenia should sell state-owned banks that were viable and
allow those that weren't to fail.
Prime Minister Alenka Bratusek identified the banks as
"problem number one" in Brussels, adding the government would
transfer a first tranche of bad loans to a "bad bank" in June.
"We will solve our problems alone," she said in Brussels.
Still, in signs of growing investor caution, Ljubljana
raised far less funding than planned and at higher costs at a
treasury bill auction held after the OECD report and investors
pushed the cost of insuring Slovenia's debt higher.
According to an assessment made last year, local banks,
mostly state-owned, hold 7 billion euros ($9 billion), a fifth
of Slovenia's annual economic output, in bad loans.
The Paris-based organisation predicted a second straight
year of economic contraction, by 2.1 percent, citing the
uncertain costs of bailing out lenders, poor demand from euro
zone neighbours for exports, and higher borrowing costs after
It also noted public debt had more than doubled to 47
percent of gross domestic product since 2008 and said that could
rise to 100 percent by 2025 with no new reforms.
Investors pulled back slightly. The Finance Ministry sold
only about half of the 100 million euros it sought to raise at
an auction, and paid yields on one-year bills of 2.99 percent,
an increase by almost half from a February sale.
Five-year credit default swaps on Slovenian government debt
rose 8 basis points to 336 bps, according to data monitor
Markit, meaning it cost $336,000 a year to buy $10 million of
protection against a Slovenian default.
ENOUGH CASH TILL AUTUMN
Igor Luksic, the head of the second largest party in
Bratusek's government, told Reuters Slovenia may be forced to
seek a bailout if it comes under more market pressure but it
still had tools to avoid it.
He said there were 2 billion euros extra in reserves at the
central bank - put there well ahead of a 2015 euro-zone-wide
deadline to raise bank reserves from 7 to 9 percent - that
Slovenia could tap if needed.
Asked whether it was possible that Slovenia would be forced
into a bailout, he said: "It's always possible but it is not our
first option. I'm afraid of organised pressure of financial
markets which we cannot fight against."
The OECD said Slovenia now faces "a severe banking crisis,
driven by excessive risk-taking, weak corporate governance of
state-owned banks and insufficiently effective supervision
It said last year's estimate of the level of bad loans in
the banking system was outdated and used weak methodology, so
"capital needs ... could in fact be significantly higher."
It welcomed the "bad bank" plan but said "lack of
transparency and potential political interference pose risks".
It added that weak corporate governance and credit
misallocation could potentially be attributed to corrupt
behaviour. The OECD urged Ljubljana to put the banking sector
through tougher tests and publish the results, then recapitalise
distressed but viable banks, preferably through share issues.
But it said market valuation showed equity in state banks
had been "virtually wiped out", and banks that weren't viable
should be wound down, with holders of subordinated debt and
lower-ranked capital instruments absorbing losses.
Banks that could be recapitalised should then be privatised,
the OECD said. It criticised a plan being discussed by the
left-of-centre government for the state to retain a blocking
minority, saying it could lead to political interference.
It said failure to pursue reforms pledged when Ljubljana
tapped the dollar debt market last year could "significantly
raise borrowing costs", as could a higher than expected bill for
recapitalising banks. All of this put pressure on the economy.