Cyprus is different. It can be firewalled. It is just 0.2% of the EU’s GDP, after all. And a €10 billion bailout is a drop in the ocean for the eurozone, compared with historic capital needs in Ireland, Greece and Spain at roughly €64 billion, €50 billion and €40 billion, respectively. By now, this sanguine consensus has been all but demolished with the botched bailout attempt that has failed to trigger global market tremors but still exposed the hole in eurozone policymaking, with officials openly acknowledging the mess in Cyprus.
What’s more, the crisis has emboldened anti-austerity and Berlin critics, and, in a sense, cast a shadow over banks’ capital and funding structures now a dangerous taboo has been broken: insured depositors could, in theory, receive a haircut in any restructuring.
So what about Slovenia? The ECB on Friday rejected fears the country was poised for a bailout, with Slovenia's banks saddled with some €7 billion bad loans, feeding speculation the sovereign could be the next domino to fall. Slovenia was one of the worst performers in the Euromoney Country Risk survey in 2012, after its score plummeted 11.1 points to 60.5. This leaves Slovenia ranked 11th in the eurozone for sovereign risk and 37th globally.
The sovereign’s score decline last year was underpinned by worsening banking stability and government finances indicators, which fell 1.2 and 0.7 points respectively in the country’s economic assessment criteria.
Slovenia’s banking sector has plummeted the furthest in eurozone, according to ECR:
In a hilarious post, the blogger and EMEA analyst, known as @barnejek, caricatures the "follow the money" market psychology that has heaped on fears about Slovenia:
| "There must be a small country in the eurozone, which has some problems with its banks and which we could sell. Hang on, what’s this little thing east of Italy that no one really knows about but occasionally makes some noises in the media? Slovenia! OMG, this is so exciting! Banks in Slovenia have NPLs reaching 20%? Some of them did not meet the ECB stress tests? The government recently collapsed and there’s a risk of an early election? I guess we’ve found a retirement trade. And don’t bother me with details that assets of the Slovenian banking system are only around 135% to GDP or that the total government financing needs for this year are projected by the IMF at 7.7% of GDP (slightly below Germany, Austria or Finland). Who cares that if the IMF’s forecasts are to be believed then Slovenia will meet both fiscal Maastricht criteria next year as it still has debt to GDP below 60%. And also, I’ve never believed in this cyclically-adjusted primary surplus mumbo jumbo... |
Here's more face-value analysis from the aggressively young Peter Attard Montalto, EM analyst at Nomura:
| The core of both countries problems is also much more banking sector than fiscal. Slovenia has a difficult fiscal balancing act and a very tight funding programme path to negotiate, with large risks to the deficit –but fundamentally it can (bar more serious eurozone deterioration outcomes being realised) cope on its own from a solely fiscal perspective. Cyprus was similar though with larger near -term bond redemptions to cover. |
Cyprus has already rejected a good/bad bank solution but there is light at the end of the tunnel, reckons Montalto:
| "Key to the market latching onto and initiating this self-fulfilling cycle however will be the comparisons it makes to Cyprus and the banking sector with this topic in focus. While the banking sector in Slovenia is much smaller than that of Cyprus as compared with the economy, Slovenia has a much higher loan to deposit ratio at 153% in the latest data as compared with 105% in Cyprus. |
But this is the killer:
| "If we consider that some EUR7bn of bad debt or at risk debt has been identified by the central bank in Slovenia, and then that the bailout is EUR4bn and provisioning is already at 42% we can see that the bad debt is covered. However, the additional critical issue, and why the IMF says an additional EUR1bn is needed, is because some banks have tier 1 capital below the required 10% level which therefore is a gap of about this size. |
As a result, Cyprus contagion and EU politics will inevitably hold the key:
| "It is not so much that we trust in the EU's proclamation that the deposit tax in Cyprus is a “one-off” (we don't), it is more that the political dynamic of Slovenia is totally different to Cyprus especially when it comes to Germany. The exposure of German banks to Slovenia is much lower than to Cyprus (at EUR7.6bn vs EUR3.1bn); however, other key votes like Austria and Italy have larger exposures to Slovenia than Cyprus (for Austria EUR12.6bn for Slovenia vs EUR0.9bn for Cyprus, and for Italy EUR7.6bn and EUR1.3bn respectively). |
Let's hope when push comes to shove EU policymakers don't throw chilli sauce into the eyes of European solidarity like they did in Cyprus.