Last updated: December 12, 2013 12:33 pm

Slovenia plans €3bn bank recapitalisation to avert bailout

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Slovenia’s finance minister has laid out his plan to avoid becoming the sixth eurozone country to require an international bailout, saying he will inject €3bn into the country’s three largest banks to help cover a €4.8bn capital shortfall in the financial sector.

The funding requirement, which was higher than many officials expected, was revealed after a review of the shaky banks by four private consultancies. Leaders hope the review, demanded by Brussels, will draw a line under the country’s financial crisis.

“All the measures adopted today were urgently needed,” said Uros Cufer, Slovenia’s finance minister. “This is an important step forward towards the stabilisation of the Slovenian banking sector.”

In addition to the €3bn in aid to the state-owned banks, which includes €2.1bn in government cash and €905m in bonds, an additional €441m will be saved by imposing losses on junior bondholders. Five other smaller banks that need a combined €1bn in funds will be required to raise it in private markets before June 2014.

The €3bn bill is at limit of the country’s resources, many officials believe. Despite the high capital needs, which amount to almost 15 per cent of economic output, Mr Cufer said the country’s sovereign debt would rise to 76.5 per cent of gross domestic product, still among the lowest in the eurozone.

EU officials said Ljubljana had worked with its small group of private investors to ensure it could raise enough money to meet the needs, and the benchmark Slovene 10-year bond rallied on the announcement, with borrowing costs dropping 33 basis points to 5.32 per cent.

“The capital shortfalls are on the high end of both official and private sector expectations,” said Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy. “As a bailout would kill this coalition, the government has spent significant time wooing the private sector, so financing these gaps is unlikely to be a problem.”

Senior officials from the troika of international lenders – the European Commission, European Central Bank and International Monetary Fund – have raised concerns about the structure of the Slovene banking system, arguing that even if Slovenia can pay for the rescue on its own, a full bailout programme could force a needed overhaul.

Without outside intervention, some officials worry the ties between bank executives, government officials and corporate leaders – a cosiness that many blame for putting the country in its current predicament – may make Thursday’s effort only a temporary fix before it returns to uneconomic lending practices.

“That’s the million dollar question,” said one EU official involved in the talks. “You need to address the root problems, the root causes.”

Still, officials said Ljubljana’s commitment to privatise all three large banks would help solve many of their governance concerns, adding that the European Commission would be monitoring the process.

“This represents a convincing and robust response to one of the key challenges facing the country,” said Olli Rehn, the EU Commission’s economic chief. “Today it is clear that Slovenia can proceed with the repair of its financial sector without turning to her European partners for financial assistance.”

The commission must still sign off on the plan, because Brussels must clear all bank restructuring measures that involve state assistance. The commission said it was reviewing the scheme but would come to a conclusion shortly.

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