Slovenia’s hopes of avoiding becoming the sixth eurozone country to require a bailout could hinge on its ability to access the international capital markets – but, ironically, its very membership of the currency union is making it much harder to issue debt.
The A2/A+/A rated Balkan country has been trying to issue a euro-denominated bond since April but has failed so far. In stark contrast, other Central and Eastern European countries that stayed out of the eurozone have managed to issue in the currency this year.
This includes Triple B rated Bulgaria, which earlier this month launched a €950m five-year transaction, after receiving €6bn of orders. While Bulgaria’s deal was its first in 10 years and benefited from rarity value, its success was also testament to how investors are distinguishing between troubled eurozone nations and solidly managed non-members.
As Bulgaria sold its bond, Slovenia was forced to watch from the sidelines with its head of funding trying to reassure investors through an update call.
A senior Treasury official told IFR at the time that the country was still committed to a new issue. “We are still planning on coming to the market this year, but it all depends on the circumstances,” said Bostjan Plesec, director general of Slovenia’s Treasury Directorate.
Some bankers reckoned, however, that Slovenia’s chances of issuing in euros anytime soon had gone. “Their euro deal is dead,” said a capital markets official. “They explored the idea in the same week that Bulgaria issued but couldn’t do it. That’s quite telling.”
Another banker said: “Slovenia’s eurozone membership has become a handicap. It’s become difficult for them to issue.”
It is a remarkable turnround in Slovenia’s fortunes. “They’ve always issued in euros since joining the eurozone in 2007 and it’s never been difficult for them,” added the banker.
He said that traditional buyers of the country’s euro debt – investors with rates portfolios, for example – would no longer support such an issue in the necessary volume. “They will buy Triple A agencies and Bunds but it’s more challenging to buy Slovenia.”
Turning to dollars?
Some bankers think it would be easier for Slovenia to issue in dollars instead – in an effort to generate interest among emerging markets investors. “It would be the best source of funding,” said the capital markets official.
“Emerging markets investors are used to looking at tricky situations. It could be the route to funding they need but they are averse to the idea,” he added, putting the chances of such a deal at less than 50%. Slovenia has not issued in dollars since it joined the eurozone.
Slovenia needs to raise about €700m to fund its budget deficit before the end of the year. It could do this through domestic bank borrowing or its T-bill programme, but it would prefer a syndicated deal in the international markets. Even auctions are getting considerably more expensive, with the government paying more than 100bp extra at a six-month bill sale last week compared with its previous fundraising exercise. The rate of 2.5% compares with 1.45% in May. Yields on 12-month bills rose by 50bp to 3% from 2.5% in June.
Speculation has been mounting in recent weeks that Slovenia, weighed down by growing concerns about its underperforming and under-capitalised banking sector, will follow Greece, Ireland, Portugal, Spain and Cyprus in seeking official aid.
The prime minister has denied that the government needs a bailout. Market participants agree that Slovenia has not reached that point – yet. However, if the country remains unable to raise private capital to support its weak banks then it could be forced to turn to the eurozone’s bailout funds for help.
“The main concern is the country’s banking sector. If the government can’t raise funds to support the banks, it could end up in a similar situation to Spain, although not on the same scale,” said the capital markets official.
Loss-making
A research note from RBS last week highlighted just how weak the country’s banks are. The sector has been loss-making for two years with an NPL ratio of 15.5% at the end of 2011. The capital adequacy ratio of 12.1% is the lowest among the CEEMEA economies covered by RBS.
“The sector’s weakness combined with the wider economy’s vulnerability to the financial sector has made for a toxic mix,” according to Abbas Ameli-Renani and Demetrios Efstathiou, analysts at the UK bank. With total banking assets at 128% of GDP and the government’s ownership of the sector at 20%, the state is increasingly vulnerable to further financial sector weakness.
“Overall, we are concerned that the extent of the banking sector’s weakness means that the government may ultimately have to seek a bailout package,” said the analysts.
