Slovenia: Government recapitalizes banking system, averts an international bailout
January 9, 2014
On 18 December, the European Commission approved Slovenia's plan to restructure its banking sector, which includes injecting cash and government securities totaling EUR 3.2 billion into the country's five major banks. The recapitalization plan was implemented after the results of the long-awaited stress tests on eight of Slovenia's banks were published on 12 December. The results revealed a total capital shortfall in the banking sector of EUR 4.8 billion (approximately 10.0% of GDP). The three largest banks (Abanka, NKBM and NLB) failed to pass the aforementioned stress tests, thus requiring an injection of public capital.
Abanka, NKBM and NLB received a total of EUR 2.8 billion. Abanka is expected to receive additional aid worth EUR 348 million in the coming months after the government delivers a full restructuring plan to the European Commission. Although Factor banka and Probanka were not included in the stress test because they are in an orderly wind-down process, they also secured funds, which totaled EUR 444 million. The top three banks also started to transfer non-performing loans totaling EUR 1.7 billion to the Bank Asset Management Company (BAMC) in exchange for two- and three-year government bonds. In addition, junior bondholders were forced to take a EUR 505 million haircut. The bailout plan also entails privatizing the big three banks.
Once the restructuring process is completed, the largest three banks are expected to have an overall capital adequacy ratio of around 15.0%. While the country's smaller banks met the Central Bank's capital requirements, they will have to bolster their capital adequacy by the end of June as the stress tests showed the potential for a shortfall by the end of 2015. If these banks are not successful in raising enough capital, the government will step in.
According to the government and the Central Bank, public debt is expected to reach 75.6% of GDP following the implementation of the rescue package. FocusEconomics Consensus Forecasts panelists' estimate that public debt will have climbed to 64.5% of GDP in 2013 and that it will reach 70.9% of GDP in 2014 and 73.6% of GDP in 2015. Despite the large burden that the banking recapitalization will entail, Slovenian authorities played down the possibility that the country will need an international bailout as it has built up a cash buffer of about EUR 5.0 billion. The government estimates that the country will need to borrow EUR 3.5 billion this year and believes that it will be able to finance most of the gap by issuing long-term bonds. That said, some analysts reckon that Slovenia's bleak economic outlook could prompt the need for rescue by the European Union, although they acknowledge that the possibility of this occurring has diminished. FocusEconomics Consensus Forecast panelists expect the economy to contract 0.6% in 2014, which is unchanged from last month's estimate. In 2015, the panel sees GDP rebounding to a 1.0% growth.