Slovenia Bailout Signaled by Worsening Debt Swaps: Euro Credit

Slovenia Bailout Signaled by Worsening Debt Swaps: Euro Credit

Slovenia’s creditworthiness is deteriorating at the fastest pace in the world after Cyprus as investors speculate a banking crisis will force it to follow the island nation and become the sixth euro country to need aid.

Credit-default swaps insuring Slovenian debt for five years soared as much as 66 percent to a six-month high of 414 basis points on March 28 from 250 on March 15, the last trading day before Cyprus announced plans for its rescue. It’s now up 35 percent at 338 basis points, compared with a 54 percent increase for Cyprus and 13 percent for Portugal in the period.Slovenia’s two-week old government is struggling to prop up banks hit by recession and saddled with bad loans worth about a fifth of the country’s economic output. Cyprus, which accounts for 0.2 percent of the euro region’s economy, was forced to inflict unprecedented losses on uninsured depositors and senior bondholders as part of the 10 billion euro ($13 billion) rescue of its financial system.

“Since the Cyprus resolution, Slovenia has been in the spotlight,” said Bas van Geffen, an analyst at Rabobank International in Utrecht, Netherlands. “The country’s smallness is now clearly a drawback in the post-Cyprus era, which has fueled speculation that the country might be the next Cyprus.”

Credit-default swaps on Slovenia, which accounts for 0.4 percent of the euro economy, have surpassed those for Spain, Italy and Croatia. The latter was approved to be the 28th member of the European Union last week.

Portugal Swaps

Slovenian swaps rose to within 40 basis points of Portugal’s, the smallest difference in three years and compared with a 114 basis-point gap on March 15. Swaps on Portugal are trading at 411 basis points, Croatia at 308, Italy at 289 and Spain at 282.

A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The yield on Slovenia’s dollar-denominated bonds maturing in 2022 jumped to a record 6.31 percent on March 27 from 4.98 percent, approaching levels that prompted bailouts of other euro nations. The yield was 5.83 percent today.

Worries that Slovenia will fail to implement a 4 billion- euro plan to prop up banks and lose access to financing abroad are raising borrowing costs as the government looks to tap bond markets, though Finance Minister Uros Cufer said April 3 he’s in no rush.

Government Response

“It is important the government responds quickly on its economic policies,” said Tim Umberger, a senior analyst at East Capital International AB in Moscow. “The new government has to continue with fiscal consolidation, bad bank plan and embark on a privatization plan, if it wants to have continued markets access for a possible bond sale.”

Slovenia adopted the euro at the start of 2007, becoming the first post-Communist nation to make the switch, and its economy outperformed that of Europe’s common currency area for most of the past decade before the recession and collapse of the construction industry hit its banks.

The nation’s budget deficit is forecast to widen to 5.1 percent of gross domestic product at the end of the year, mostly due to the conversion of the state’s hybrid loan for Nova Ljubljanska Banka d.d. into equity, the European Commission said in a report Feb. 22.

Bank Failure

Nova Kreditna Banka Maribor d.d., which had a 205 million- euro loss 2012, was one of four banks that failed last year to meet European capital targets set by regulators. Bank of Cyprus Pcl, Cyprus Popular Bank Pcl, known as Laiki Bank, and Italy’s Banca Monte dei Paschi di Siena SpA (BMPS) were the others. Laiki was closed as part of the island nation’s bailout.

Still, Slovenia’s banking system is smaller relative to the size of its economy than most European countries and more similar to Spain than to Cyprus, according to Umberger and Georg Grodzki, head of credit research at Legal & General Investment Management in London.

Cyprus’s banks, which lost 4.5 billion euros on Greek sovereign debt, had assets about eight times the country’s economic output, more than double the average for the euro area. Slovenia’s were about 1 1/3 times, compared with about three times for Spain and 2 1/2 times for Italy, Bloomberg data show.

Public debt in Slovenia is also lower than elsewhere, at 53.7 percent of GDP in 2012, compared with 86.5 percent in Cyprus and 81.6 percent in Germany, though it will rise to 59.5 percent by the end of the year and to 63.4 percent in 2014, according to EU forecasts.

Default Probability

Default swaps on Slovenia are 56.5 percent higher since the start of the year, the most in the region, followed by 36 percent for Hungary and 32 percent for Croatia. They signal a 22 percent chance of default within five years.

There were a total of 780 swaps contracts covering $717 million of Slovenian debt as of March 29, according to the Depository Trust & Clearing Corp., which runs a central registry for the market. That compares with 306 contracts insuring $281 million of Cyprus’s debt and 13,579 trades covering $20.2 billion of Italy’s.

“Cyprus sensitized people again to small European countries with weak banking systems,” Grodzki said. “Slovenia most likely will require external help to recapitalize the banking system, but the government can probably shoulder the extra debt without having to bail in senior bondholders and depositors.”

To contact the reporters on this story: Abigail Moses in London at Amoses5@bloomberg.net; Boris Cerni in Ljubljana at bcerni@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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