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Guest Commentary: Slovenia Doesn't Need a Bailout, as Long as the Mood Doesn't Deteriorate

Guest Commentary: Slovenia Doesn't Need a Bailout, as Long as the Mood Doesn't Deteriorate

2012-07-18 04:00:00
Yohay Elam, Forex Crunch,
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Talks about a bailout for Slovenia have been circling in the markets, and have been denied at the recent Eurogroup meeting. Given past declarations, denials meant that a bailout is imminent.

However, looking at Slovenia, the situation there isn't that bad. What could lead the country to the hands of the troika would be a deterioration of the mood in Europe, but not Slovenia's internal issues.

Slovenia was the richest Yugoslav region and suffered the least from its succession from the Yugoslavia. When it joined the European Union in 2004, it was praised as being well prepared. It was also praised when joining the euro in 2007.

Its metrics still seem sound. The Debt to GDP ratio is at 47.6%, well under the 80% euro-zone average. The unemployment rate of 8%, well below the euro-zone rate of 11.1%.

The bigger issues in Slovenia are with the banks: Nova Ljubljanska Banka (NLB) lacked sufficient funds according to the recent requirement of 9% Tier 1 capital. The relatively low debt-to-GDP ratio allowed the government to come to Slovenia's aid. This is what pushed Slovenian yields to higher ground.

This does weigh on the deficit, but the government already took measures to curb spending. Slovenia sees the deficit falling from 6% in 2012 to 3% in 2013.

All in all, Slovenia is doing OK and isn't comparable to Greece.

What could force Slovenia to take a bailout? A further deterioration or a "discovery" about the bank debt could trigger asking for external help, but this doesn't seem to be on the cards now.

A comparison of Slovenia to Greece. Such a statement by PM Janez Jansa, when he wanted parliament to approve more austerity, raised concerns. More talk could worsen the situation.

A Greek exit of the euro-zone: This could result in a blind credit rating downgrade of euro-zone countries by rating agencies, and Slovenia will not be spared.

A heightened exodus of funds from all euro-area countries: As investors move money away from the EMU, a country like Slovenia could suffer, even if it is doing relatively well.

Slovenia has a population of 2 million citizens. While yet another bailout in Europe is bad news, the real economic is not comparable to any small modification in the aid needed by Spain.

Further reading: Finland Threatens to Leave Euro-Zone

By Yohay Elam, Forex Crunch

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