As we noted yesterday, Slovenia appears the inevitable next player set to experience the non-template of uninsured depositor bail-ins and the good-bank-bad-bank solution that was uniquely applied to Cyprus. However, global investors should rest assured as this miracle of modern financial engineering will not be a detriment to the nations as the Slovenian banks will be internally recapitalized (in the latest proposal) by a government guarantee. Simply put, in the world of European accounting idiocy, Reuters reports "this would not result in an immediate spike in the government's debt level, because the authorities would initially provide banks with guarantees rather than newly issued securities." Which leaves us asking, just how much is a one-week-old Slovenian government's guarantee worth in real money? And why didn't the Cypriot government just 'promise' to do 'whatever it takes' to support their banks' bad assets? Of course the chance of the bailout happening just surged:
- *SLOVENIA WON'T NEED BAILOUT, ECB'S KRANJEC SAYS
Slovenia has been thrown into the spotlight as the next eurozone country likely to seek an international bailout, given the fragile state of its banking sector.
While the government insists that Slovenia will be able to get through the crisis under its own steam, a deal with international lenders could provide a key backstop to fears of contagion, say analysts.
"Slovenia is now inevitably heading to a bailout, the eurozone shot itself completely in the foot following the Cyprus issue," said Tim Ash, head of EM research ex-Africa at Standard Bank.
"There is a pocket of interest [among investors], so an international bond issue could work, but they would have to pay up massively," said an origination official. "They would need some tailwind as well."
The government might also need to target US dollars, rather than euros. "In euros no way," said a second banker. "US dollar investors are used to volatility. They definitely still have access to US dollars."
"Market momentum is moving against Slovenia, and quick," said Ash. "It will be tough and expensive for them to put a new issue to bed without significant backstopping from the Troika."
Part of the uncertainty still surrounding the country is due to adjustments that the new governing coalition - led by Prime Minister Alenka Bratusek - has pledged to make to the original 'bad bank' proposal put forward by the previous Janez Jansa administration.
One of the key tweaks now under consideration, according to RBS, is the creation of internal bad banks within each of the country's largest financial lenders, postponing any transfer of toxic assets to an external bank asset management company to a later date.
"Initially, bad assets would be transferred to the internal bad banks and backed simply by government guarantees," said Abbas Ameli-Renani, an emerging market strategist at RBS.
Under the original proposal, assets would have been transferred immediately to the BAMC in exchange for newly-issued government bonds.
While there will be a simultaneous recapitalisation of banks under both arrangements, the new version would not result in an immediate spike in the government's debt level, because the authorities would initially provide banks with guarantees rather than newly issued securities.
One of the downsides, however, is that the plan will keep bad assets on banks' balance sheets and under the same management.