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Thursday, December 12, 2013

Slovenia dodges bailout as it swallows cost of bank overhaul alone

The Slovenian Central Bank this morning released the long anticipated results of the stress test of Slovenian banks. The full results can be found here, while the press release is available here and a reader-friendly Q&A here.

The release did not begin well, with the English feed of the conference proving slow and laggy – similarly to the tests themselves, whose results have been delayed a couple of times. Beyond that, though, things went much as expected, with the tests showing a €4.8bn hole which needs to be filled, around the expectations of €4bn to €5bn. Below, we lay out our key thoughts:

The macroeconomic scenarios include some optimistic export numbers. As we have said before for Slovenia, and others, relying on exports alone to prop up GDP can be a risky game.

The tests are based on data from the end of 2012. This is a problem with these tests in general, but has been exacerbated by delays in the case of Slovenia. The data are one year out of date – a year where the Slovenian economy has struggled, and non-performing loans held by banks have increased steadily.

The €4.8bn figure is taken from the adverse scenario, and it's not exactly clear why this is done when the figures shown under the base scenario are normally used in these tests. This could be seen as an attempt to be 'extra conservative', or a sign that the base case is a bit outdated in terms of projections or data.

€3bn of the money will come from the government and be injected into the three largest state-owned banks (NLB, NKBM and Abanka). €2bn will be in the form of cash, with the rest in the form of government securities. A further €441m will come from a 100% write-down of subordinated debt.

The largest banks will also transfer €1.7bn in non-performing loans to the country’s bad bank – exactly what price this will be at remains unclear. It is also unclear if the bad bank will require further state support. Overall, this is a huge amount of support for the largest banks in the sector. The remaining small banks will be forced to raise around €1.1bn through private sources before June 2014. If they fail, then the government may step in once again (although this will certainly involve further bail-ins).

As a result of this bank recapitalisation, Slovenia's government debt will rise to 75.6% of GDP. Not massive by standards of the eurozone crisis, but high enough that we could see upward pressure on borrowing costs, especially given the poor growth outlook for the economy. It also means that both the public and private sector in Slovenia is heavily indebted. This risks weighing on the economy, and could potentially create a downward spiral as domestic demand, investment and government spending falls.

One of the more astonishing figures (to us) is that the stress tests cost €21 million (around 0.06% of GDP) to conduct, due to fees for the consulting firms such as Oliver Wyman, Roland Berger, Ernst & Young, and Deloitte.

So far, then, Slovenia has managed to avoid the need for external aid, despite a significant overhaul of its banking sector. However, the economy remains in a fragile state, and any shocks to the system over the next six months, as the overhaul takes place, could push the economy into a wider and deeper crisis.


Rik said...

Hardly interested in Slovenia, but I would be very surprised if the situation would be different from the likes of Spain and Greece.
Simply whichever tests are done these never bring all the issues to the surface not even remotely.

Always by using the same 'technique', summarised dodgy bookkeeping. Not taking losses when sound bookkeeping principles would demand so, but moving to legal rules that allow a lot more 'flexibility' (dodgyness if you like).

This only works however for a relatively short time. Basically usually in a few years time at the most Cash Flow will simply show the skeletons. Money doesnot come in that according to the BS should be coming in and/or things have to be paid for which there is no provision or alike.
If no real profits are there to pay for that at that point you have a problem.

Basically what this does is only buying time. Not more not less. And sometimes it works. Usually when the dip is not too big and takes too long and followed by a profitable period.
Which is exactly the problem here, the end of the dip is realistically speaking not in sight. And even if it would be it is highly uncertain if dip would be replaced by basically positive CF to be used to pay for (hide if you like) the creative bookkeeping in the earlier dip.

Simply doesnot seem to be in place in places like Spain (where half the business loans are to companies that not even have sufficient CF to pay the interest on those loans). Meaning provisions in banks are way too low and there is no way that sufficient investments will be made to make the turn. A deadly mix.
And as said it would be a complete surprise if this would be different in Slovenia.

The only things you have done are buying some time but at the same time tying relatively healthy sectors to zombies. And as now these relatively healthy sectors look in no way strong enough to carry the extra weight simply endanger them as well.

My guess is that the local capos simply are more likely wanting to avoid people looking over their shoulder than doing the right things (by themselves).

Jesper said...

The QA had a section about accountability. It will be interesting to see what comes out of that. There was nothing there about protection for whistleblowers. If Slovenian authorities do like the authorities did in Ireland, threaten whistleblowers with prosecution, then I'd expect Slovenia to get the kind of accountability the Irish got - none.

Only way to break a code of silence is to offer deals for people willing to talk. Will such deals be offered or will authorities help enforce the code of silence by threatening to prosecute people who come forward?