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The meeting last week of the Eurogroup of ministers in Vilnius, passed off with generally warm words of support for Slovenia reports in the German media earlier last week had hinted that the Bratusek administration might be pushed to accept a Troika bail-out. This follows the failure of two small banks (Probanka and Factor banka, which together accounted for just over 4% of assets of the banking sector) in Slovenia earlier this month which forced the Bank of Slovenia to step in, committing as much as EUR1bn in state guarantees to ensure their orderly liquidation. In the event, Eurogroup officials reflected on the "progress being made", and "the strength of action" being taken by the Slovenian authorities.
Nevertheless what was clearly evident from official commentary around the bank failures noted above, and also the on-going stress tests being conducted on the Slovene banking sector, is that officials from the ECB and EC are now intimately involved with their Slovene counterparts to ensure the Bratusek administration's reform efforts comply with EU standards, and hopefully in ensuring resolution of the underlying problems, particularly in the banking sector. Perhaps of some significance, Slovenia's own minister of finance, Uros Cufer, speaking on the sidelines of the Eurogroup meeting, accepted that a Troika bail-out could not be ruled out, and indeed hinted that contingency plans were being drawn up in this respect, but that the government still thought that it had the resources to address the country's significant challenges "under its own resources". We see these latter comments as being significant as Slovenian officials and politicians have hitherto made much of the importance of the country getting by "under its own steam", seemingly a point of national pride/prestige. The message from Cufer was perhaps a warning to more obstructionist members of the ruling coalition that they need to buckle down and support deeper reforms, if Slovenia is to avoid the ignominy of going down the Troika bail-out route.
So what is new?
In terms of financing, Cufer, indicated that the government still had a cash buffer of between EUR2.4bn and EUR3bn, which he viewed as being sufficient to cover financing needs well into 2014.
Cufer also revealed that on-going bank stress tests would be completed by November, with troubled assets finally transferred to the Bank Asset Management Company (BAMC, the bad bank in effect) by the end of the year. The earlier hope had been that these assets would have been transferred by June this year. However, press reports have suggested that the EC/ECB have pressed the Slovenian authorities to run much more telling/rigorous stress tests, perhaps to ensure post recapitalisation/asset transfer, the Slovene banking sector is in a much stronger/robust position. Also perhaps, after experience from the European periphery, the desire from the ECB/EC is that any hit from bank recapitalisation costs is taken in one go, and that there are no "surprises" further down the line which can have the tendency of gradually eroding confidence in the whole process, and ultimately through the resulting weaker growth/recovery boosting the bail-out costs.
In terms of the costs of bank recapitalisation to the sovereign, Bank of Slovenia officials recently upped estimates of costs from EUR1.2bn to EUR1.5bn. However, both Fitch and S&P recently indicated that the costs of bank recapitalisation could be as high as EUR2.8-3bn (around 8% of GDP). NPLs in the banking sector are thought to amount to the equivalent of as much as 20% of GDP. The government has indicated that bank recapitalisation costs might boost the budget deficit to close to 8% of GDP this year, but this might now be raised to 12-13%, putting further upward pressure on public sector debt/GDP levels.
The government had previously promised the EU/ECB that it would produce an updated National/Stability Programme, by October 1, centred around various fiscal consolidation efforts, feeding into the budget for 2014. Indications are that this new programme will be presented on September 25, and media reports suggest that a joint EC/ECB team, including Eurogroup chair, the Dutch finance minister Jeroen Dijsselbloem, will visit Ljubljana in early October presumably to assess these plans. An IMF Article IV mission is also now expected to visit Ljubljana over the next month. The EC/ECB/IMF missions are likely to take a far ranging review of the government's reform efforts, from banking sector reform, fiscal consolidation and broader structural reform.
Earlier year efforts at fiscal consolidation were significantly oriented to the revenue side, and Minister Cufer has warned that further efforts in this regard mush re-focus on expenditure line items, with the difficulty in ruling out cuts in pensions/public sector wages. Already, as of July, the YTD budget deficit totalled EUR1.3bn, higher by 40% YOY, and already close to the revised (higher in July) EUR1.5bn (4.4% of GDP, excluding bank recapitalisation costs) budget target for the year. The weak state of economic activity and subdued inflation depressed the revenue side, while recent court rulings (e.g. against pension cuts) undermined earlier efforts at reigning in the expenditure side. The government had earlier promised the EC that it would come up with EUR200m in permanent expenditure side cuts, and a failure to bring a meaningful improvement with the budget would force adoption of an emergency crisis tax on all taxpayers. For 2014 the government is committed to introducing a real estate tax, with the initial hope that this would generate EUR240m in revenues albeit now the administration is talking of just EUR193m in revenues from this source, having scaled back plans after facing fierce political opposition.
A key challenge for the Bratusek remains its broad cross-party coalition nature, encompassing both the centre left and centre right. Getting agreement on fiscal consolidation hence looks set to be difficult. Already DeSus, the pensioners' party, have indicated that they will stridently oppose attempts to cut pensions, and even any attempt not to pay the annual pensioners' bonus paid at year end. By contrast, the Citizens List (DL) party, given its centre-right/pro business focus, seems eager to limit any further tax hikes, pressurising the administration instead to do more on the expenditure side. Ministers from DeSus have even threatened to leave the ruling coalition which would erase the coalition's majority and then threaten early elections. Coalition unity has, meanwhile, already been shaken by reports of division within the DL over the course of economic policy particularly the extension of state guarantees to facilitate the winding up of Probank and Factor banka. One further political risk to watch over is the possibility that the opposition Democrats (SDS) might seek a vote to oust Minister Cufer over an on-going spat over the recent removal of an SDS nominee to the Bank Assets Management Company (BAMC). Cufer is emerging within the coalition government as a hawk in terms of pressing for more aggressive fiscal consolidation we doubt the largely "technocratic" Cufer will be removed, but his forced departure would clearly represent a significant blow to the coalition and for investors.
Pressure from the EC/ECB and market to push through fiscal consolidation this year is likely to strain the ruling coalition, but we still doubt that any of the main political players will yet want to bring this coalition down at least not before European elections due in May 2014. Opinion polls for one part still suggest widespread apathy/disillusion amongst the population at large. Herein a poll by the School of Advanced Social Sciences conducted earlier this month had the government's approval rating dropping further to just 33.5%, from 34.4% in June. More striking, however, was a huge increase in the number of undecided voters, which rose from 38% in June to 50% in September. Of the main parties, support for prime minister Bratusek's Positive Slovenia Party dropped to 6% - it won the largest share of the vote in the 2011 elections. Meanwhile, support for the Democrats, also a member in the ruling coalition, dropped to 11.4% from 16.3% in June. Support for the opposition Social Democrats (SDS) even fell from 13.3% in June to just 9.4% this month. The only "winner" was DeSus which saw its poll rating increase moderately to 4.4%, but it is still only just above the 4% threshold required to secure parliamentary representation. The above would suggest that parliamentary deputies will still be reluctant to risk early elections for fear of falling into an Italian scenario where all mainstream parties do poorly, and perhaps a new political force/movement, with an unpredictable agenda comes to the fore. The likelihood still is that even should the coalition collapse, pressure will still be on parties in parliament to cobble together a new ruling coalition to take forward the baton of reform. The government will thus likely just do enough to keep the EC/ECB and the markets on side at least to take the story into the May 2014 European elections.
bne- Standard Bank
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