Saturday, May 11, 2013

Slovenia Banks, the next to fall

The last time I strolled across the Dragon Bridge in the heart of Slovenia's capital I never envisioned that I would be writing this article. After what happened in Cyprus only a fool or a moron would leave their money in a Slovenian bank. Rising loan losses resulting from a housing bust and a second recession in two years have left a hole of about 7.5 billion euros ($9.9 billion) at Slovenia-based lenders is one estimate. That’s a lot for a 35 billion-euro economy: A bank bailout would push government debt above 70 percent of economic output. The three biggest banks are government-owned or controlled and make up almost half the financial system. It’s not impossible, but it’s very unlikely that Slovenia can manage to pull off the bank restructuring without any EU money.

Slovenia may need assistance from the European Union, and holders of bank bonds, including the most senior creditors, could be forced to take losses, according to Raoul Ruparel, head of research at London-based Open Europe. This would be the second such "bail-in" to take place in the euro zone, after Cyprus and risks deepening the divergence in the monetary union by keeping borrowing costs higher in economically weak nations. Slovenia is trying to avoid following Cyprus as the sixth country using the euro to require a bailout. The cost of cleaning up its banks may force Slovenia to join Ireland, Spain and Greece in seeking aid, government debt has more than doubled since 2008, partly because of the cash injections to keep banks alive. Those reciprocal money flows have reinforced the link between sovereign indebtedness and bank solvency that euro-zone leaders vowed last year to break.

The country's current government, in power for less than two months, has pledged to carry out the previous administration’s bank- restructuring plans, this includes creating a so-called bad bank to move as much as 4 billion euros of nonperforming debt out of the lenders and recapitalize them. A big problem is soured debt, delinquencies account for 20 percent of total loans, and that could rise to 27 percent. As much as 90 percent of the soured debt is held by locally owned banks whose bad-loan ratio could soar to 34 percent, according to some estimates. That would amount to 5 billion euros for the three biggest lenders, Slovenia, a nation of 2 million people that accounts for 4 percent of the euro-zone’s economic output. They joined the monetary union in 2007, now its membership may require it to impose losses on senior bank creditors.

Germany leads a chorus of monetary union countries advocating such burden-sharing in restructuring costs. Banks in weaker euro-zone countries already pay more interest for deposits, ranging from 2.5 percent to 4.5 percent, while German or Finnish counterparts pay as little as 0.5 percent, and it would be far worse without the direct intervention of the ECB. This translates to higher lending rates for companies in countries from Slovenia to Spain, hurting efforts to improve their competitiveness with German counterparts. Non-financial corporations in Spain, Ireland, Greece, Italy, Portugal, Slovenia and Cyprus pay an average of 5.4 percent for new loans maturing in one-to-five years, according to European Central Bank data. Companies in Austria, Belgium, Germany, Finland, France and the Netherlands pay 3.3 percent.

Slovenia joins a growing list of euro-zone countries whose banks have pushed them to the brink of collapse, again nations have blurred the line between bank and sovereign debt. Ireland was shut out of bond markets in 2010, when it tried to prop up its domestic banks, whose assets had peaked at four times the nation’s gross domestic product. It agreed to a 68 billion-euro aid package that year. Spain’s borrowing costs surged to as high as 7.5 percent last year as the government delayed recapitalizing savings banks. The country reached an accord for 100 billion euros of assistance and has so far tapped about half of that. “Germany now says taxpayers shouldn’t bear the costs of bank restructuring, but what it really means is German taxpayers shouldn’t. Slovenian or Cypriot people are stuck with the costs since German bankers are gone.”

Slovenian taxpayers may wind up better off than their Cypriot counterparts because their banking industry is smaller, but the government needs to move fast to detail its restructuring plans and seal a deal with the EU to keep those costs under control. “It’s all manageable unless there’s a run on the bank,” said Ash, who’s based in London. “The longer you mess around, the higher possibility for such a run to happen. They need to get serious soon. If they wait too long, they’ll be toast.” Unlike Cyprus there is no foreign money from rich Russians to steal, this pain will have to be borne by the people of Slovenia. The ugly math by my calculations show, that the share, or bill to every Slovenian man, woman, and child, for this alone, and nothing else, will run about 3,750 euros or close to 5,000 dollars.

Footnote; For more on the dire situation in Europe the posts below go deeper into the subject, the first is about how things are not getting better, the second contends that Germany stocks are not surging because the country is doing so well, rather as a result of cross border money flows as wealth seeks a safer haven.



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