The first two headlines are from mainstream media outlets Bloomberg and CNBC. Note how each organization hypes the Slovenian debt sale describing it as “strong” and a “win.” Both articles neglect to inform the reader the reason for these fantastic results.
The two state owned banks were coerced to participating in what amounts to an extension of the €885mm debt issue maturing in June. The banks purchased the T-bills from the government who in turn purchased portions of the June issue from the banks. The net result of the transaction is that Slovenia is rolling over the debt to its captive banks so that it does not have to use bond markets. The terms are attractive for the banks in that they are being taken out at 99.525% of par, which is a significant premium to the market price.
At this juncture, it is doubtful that a Slovenian bond issue would price near the 4.15% rate the banks are receiving for the T-bills. In typical Eurozone fashion, Slovenia’s GDP is decreasing, and its government debt is rising. Meanwhile, non performing loans continue to rise. They’re currently at 20% and will probably move higher as the effects of a property bubble work its way through the system.
The estimated cost for cleaning up the banking sector is €3-4bn, but this is figure is suspect due to its source, the Slovenian government. Based on the bad loan percentage, the cost to recapitalize the banks is around €6bn and still rising. Just this amount would increase Slovenia’s debt to GDP ratio from 50% to 75%. Large yearly budget deficits will also add to the final number.
In this environment, it will be difficult for Slovenia to sell its bonds to anyone other than its state owned banks. As such, the country will require some sort of Eurozone assistance to continue financing itself. Slovenia is not bad off the other peripheral countries, so merely activating the OMT program as opposed to a full-scale bailout may be the answer here.