Will Slovenia Be Next to Ask for a Bailout?

According to some European economists, Slovenia is increasingly likely to become the next economy asking for a European Union bailout for its struggling banking sector, after Cyprus last week became the fifth euro-area country to ask for financial aid from the euro zone.

Slovenian borrowing costs rose last month to the highest level since February, with the yield on the 2021 bond reaching 6.1 percent on June 29th. Greece, Ireland, Portugal and Spain were also forced to seek financial aid after their borrowing costs surged.

The country, which adopted the euro in 2007, is assessing the fiscal burden of covering the liabilities of its financial industry after Nova Ljubljanska Banka d.d. (NLB), the largest bank, got a capital boost.
The Solvenian Finance Minister, Janez Susters, said after the completion of the NLB capital increase, that domestic funding resources should be sufficient to help local banks, and there would be no need for the EU’s financial aid.

Still, the Central Bank has repeatedly urged Slovenia to recapitalize its banking industry, which relies on loans from the European Central Bank for liquidity. If the euro zone debt crisis escalates further, it would likely push bond yields up to prohibitively costly levels, which would as a result force the Slovenian government to make a request to the International Monetary Fund and the EU for a bailout

The country’s public debt has more than doubled to 47.6 percent of economic output since euro adoption and will advance to 54.7 percent by the end of 2012, according to a May report by the European Commission.

The government in Ljubljana has adopted measures, including public-sector wage and social benefit cuts, this year to bring down its budget spending by about 800 million euros in order to reduce the budget deficit, after it had reached 6.4 percent of gross domestic product in 2011.

According to Eurostat, Slovenia is the only eastern EU nation that did not get richer relative to its peers last year. Its output per capita, adjusted for purchasing power, fell for a third year, to 84 percent below the EU average, from 85 percent a year ago. Furthermore, the OECD forecasts that Slovenian economy may contract 2 percent this year. Seven other eastern-bloc nations, including Poland – the region’s largest economy – continued to catch up with the west.

Source: Bloomberg

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