On 18 March the nation’s
central bank, the Bank of Slovenia (Banka Slovenije), issued a press release
stating that the situation of Slovenia Cyprus
In the press
release – issued only in Slovenian and not in English – the Bank of Slovenia points
out that in Cyprus Slovenia
The Bank goes on to
state that while the problems of the Cypriot banking system arose due to low tax
rates for foreign investors, which attracted many deposits from abroad, deposits
by foreign non-financial corporations in Slovenian banks account for just 1% of
the liabilities of Slovenian banks, and, unlike the situation in Cyprus,
non-residents comprise just a token share of depositors in Slovenian banks.
Analysis
The press release helpfully provides hypertext links to the very tables
and data series that demonstrate the points given in the last paragraph above. But if one follows the links and examines the
latest statistics carefully (Jan. 2013) one notes that while it is true that “deposits
of foreign non-financial corporations” in Slovenian monetary financial
institutions (excluding the central bank itself) come to just 129 mln EUR and
that “total liabilities” (deposits + debt securities) of all MFIs (excluding
the central bank) come to 41,222 mln EUR, if one widens the numerator to
include all deposits by foreign parties and narrows the denominator to
include only deposits (and not debt securities, i.e., bonds), then one
sees that no less than 22.3% of the 38.8 bln EUR of deposits in the Slovenian
commercial bank system are owed to foreign parties, meaning that Slovenia is
indeed vulnerable to a bank run by foreign depositors.
The following data are drawn from the Bank’s monthly statistical
bulletin for February, specifically from Table 1.6, which covers “Selected
Liabilities of Other Monetary Financial Institutions by Sector” (Izbrane
obveznosti drugih monetarnih finančnih institucij - sektorska členitev). (NB: “Monetary Financial Institutions” (MFIs)
is an EU statistical category that includes each country’s central bank, while
“Other Monetary Financial Institutions” refers to all MFIs except for
the central bank.)
Total liabilities of Other MFIs to foreign non-financial corporations:
Deposits: 129 mln EUR
Total liabilities of Other MFIs: 41,222 mln EUR
Total liabilities of Other MFIs to foreign sectors: Deposits: 8,658 mln
EUR
Total liabilities of Other MFIs to domestic sectors: Deposits: 30,113 mln EUR
The statistics indicate that of the 8,658 mln EUR in deposits by foreign
parties, a total of 5,486 mln EUR are deposits by foreign MFIs in “domestic
currency” (i.e., EUR) with an agreed maturity that counts as “long-term”.
The press release concludes
with a detailed explanation of how Slovenia
Sources:
Sporočilo
za javnost - Slovenije in Cipra ni mogoče primerjati (pojasnila glede na razvoj
dogodkov na Cipru) (2013-03-18)
Statistical bulletin for February 2013 (Slovenian): Bilten,
februar 2013 (see Table 1.6)
Statistical bulletin for February 2013 (English): Monthly
bulletin February 2013 (see Table 1.6)
Also on 18 March, a staff mission of the International
Monetary Fund completed a visit to Slovenia and issued a concluding statement
in Ljubljana. Because a considerable
portion of the statement deals with Slovenia’s banking sector, the entire
statement is reproduced below verbatim.
(Emphasis as per original).
A negative loop between financial distress,
fiscal consolidation, and weak corporate balance sheets is prolonging the
recession. Prompt policy actions are necessary to break this loop and restart
the economy. Repairing the financial sector and improving corporate balance
sheets is of the essence. The Bank Asset Management Company is an effective way
to clean bank balance sheets. Banks should be quickly recapitalized. A clear
and coherent plan is key to access international capital markets quickly.
Fiscal consolidation should continue to reduce the structural deficit, while
letting the automatic stabilizers work. Recent labor
market and pension reforms are steps in the right direction.
1. A negative loop between financial
distress, fiscal consolidation, and weak corporate balance sheets is prolonging
the recession. Real GDP declined by 2.3 percent in 2012 as domestic demand
shrank severely. The mission expects the economy to contract further by about 2
percent in 2013 and projects growth to turn positive in 2014, but this is
predicated upon implementation of reforms and continued market access as well
as a recovery in the euro area. Against this background, the risks are mainly
on the downside.
2. Prompt policy actions are
necessary to break the negative loop, to restore confidence, and to address
structural weaknesses. In recent months, Slovenia has already implemented important
labor market and pension system reforms. The Bank Asset Management Company
(BAMC) and the sovereign state holding company have been created. Building on
this framework, the new government should promptly address bank restructuring,
corporate sector debt overhang and governance, and involvement of the state in
the economy. A coherent and credible plan to address these issues is essential
to restore confidence and access markets.
Financial and Corporate Sector:
Breaking the negative loops
3. Banks are under severe distress. The share of
nonperforming claims in total classified claims increased from 11.2 percent at
the end of 2011 to 14.4 percent in 2012. The three largest banks saw their
ratio increase from 15.6 percent to 20.5 percent in the same period with about ⅓ of their corporate loans non-performing. Meanwhile these banks have repaid the
bulk of their debt with foreign private creditors, while increasing reliance on
the ECB.
4. Slovenia has made progress in
setting up the BAMC, which is an effective way to clean up the balance sheet of
troubled banks, while at the same time helping restructure the highly indebted
corporate sector. This process should be carried out with the utmost
transparency, avoiding any moral hazard arising from the close relationship between
banks, corporates, and the public sector. For this reason, the mission sees
favorably the appointment of international technical experts as non-executive
members of the board of the BAMC.
5. Banks need to be substantially
recapitalized. Despite some past recapitalization, the deteriorating loan
portfolio continues to erode bank capital. The transfer of assets to the BAMC
is not a substitute for the need to increase capital (in cash) and actually
could trigger upfront recapitalization. The recapitalization needs for the
three largest banks is estimated at around €1 billion in 2013, also identified
by the supervisor. Deteriorating economic conditions could increase the need
for capital in outer years.
6. Corporate sector balance sheets
are under significant stress. The debt to equity ratio is among the
highest in Europe. Cross ownership between large industrial groups, financial
holding companies and banks, and lengthy bankruptcy procedures exacerbate the
underlying problem of debt overhang.
7. Addressing corporate debt overhang
is key to alleviate the financial sector distress, and ultimately spur growth. The restructuring
process will benefit from an enhanced bankruptcy regime and out-of-court
settlement arrangements, areas where the IMF could provide technical
assistance. For companies under severe financial distress, the BAMC has tools
to convert corporate debt into equity. For other companies, the mission
welcomes the initiatives undertaken by the Bank of Slovenia to facilitate debt
restructuring. Viable publicly-owned undercapitalized companies should be
recapitalized by the state or attract private capital. However, the mission
cautions the authorities against taking actions on debt restructuring or
recapitalization that can lead to ineffective use of public funds. Finally,
Slovenia has to address corporate governance weaknesses. A Report of Standards
and Codes on Corporate Governance by the World Bank and the OECD could help in
this respect.
8. Slovenia needs to open up to
foreign direct investment. Misconceived defense of ‘national interests,’
including the reluctance to sell assets to foreigners, burdens the budget and
unduly prolongs the corporate and financial sector distress. A prominent
privatization could convey a powerful signal to international investors.
Fiscal: Continuing a gradual
structural adjustment
9. The frontloaded,
expenditure-based, fiscal consolidation strategy remains broadly on track in
2013.
The reduction in public sector wages and in transfers to households is
projected to translate into sizeable expenditure savings this year, while the
bulk of the impact of the pension reform will be felt over the medium term.
However, the deepening of the recession, and in particular the decline in
domestic demand, is projected to significantly reduce revenues, raising the
deficit (excluding bank recapitalization costs) to about € 1½ billion in 2013.
10. Given the severity of the
economic downturn, allowing full operation of automatic stabilizers is
appropriate, and hence corrective measures are not warranted. Fiscal
consolidation should continue over the medium term at its current pace of about
1 percent per year in structural terms, in order to gradually bring the budget
close to balance and keep the public debt dynamics under control. The structure
of public expenditure should be improved, especially in the area of social
spending, as reliance on one-off measures like wage cuts is not desirable and
is probably not sustainable.
11. Financing needs are large for
2013.
Financing requirements are particularly pronounced in summer, with bank
recapitalization needed soon and a large 18-month T-bill coming due in June. In
all, financing needs for the remainder of the year (excluding the bonds to be
issued by the BAMC) could reach some € 3 billion, and possibly more depending
on bank recapitalization needs. A large part of this financing need should be
met via external borrowing, given banks’ inability to absorb large amounts of
government paper, but also to improve the maturity structure of government debt
and reduce rollover risk. This highlights the importance of safeguarding market
access in the near term.
Structural reforms: Important step
forwards
12. Recent labor market and pension
reforms are steps in the right direction. Labor market reform somewhat reduces
the rigidity of permanent labor contracts and simplifies administrative
procedures. With this reform, Slovenia’s employment protection index as
measured by OECD will reach the OECD average. In parallel, the rules on
fixed-term contracts were tightened to limit the segmentation of the labor
market and encourage the use of permanent contracts. An important area not
touched by the current reform is the student work program. For entry level
positions companies prefer hiring student workers, which leads to increased
unemployment among young graduates and extended study periods. Pension reform
raises the effective retirement age, which along with other parametric and
regulatory changes, will lead to a stabilization of pension expenditures as a share
of GDP by 2020, but a new reform will be necessary in a few years. Both reforms
are positive steps that are gradual rather than radical. Moreover, the changes
have been thoroughly negotiated with social partners and were passed with
near-unanimous support in the parliament, creating a stable and strong basis
for further efforts.
We thank the authorities for open
discussions, excellent cooperation, and warm hospitality.
Sources:
In earlier news, in
mid-March the Slovenian government completed its planned buyout of two remaining
large shareholders of the troubled bank NLB (Nova Ljubljanska banka d.d.
Ljubljana), Slovenia’s largest bank with a market share of 24.9% by total
assets at end-2012.
Firstly on 14 March
the bank announced that on 11 March the Republic of Slovenia Slovenia
Then on 18 March
the bank announced that on 11 March the government had purchased all 2,765,282
shares of NLB stock belonging to the Belgian banking group KBC Bank N.V. KBC, which owned 21.65% of NLB voting shares,
was obliged to divest itself of the shares as part of the restructuring plan
that KBC entered into with the European Commission in November 2009, which
stipulated, “KBC will cease its activities in Serbia (market share of KBC 1%),
Russia (1%), Romania ... and Slovenia ...”
Finally, on 22
March the bank announced that on 15 March the Slovenian government had acquired
an additional 8,707,483 shares of NLB stock from the national compensation
fund. As a result of this final
transaction the government now holds 16,518,507 shares of NLB stock, giving it
voting rights of 76.91%.
Sources:
Obvestilo
o spremembi pomembnih deležev (2013-03-22)
Obvestilo
o spremembi pomembnih deležev (2013-03-14)
Market share at end-2012: Profil
NLB Skupine 4. četrtletje 2012
EC decision on restructuring plan for KBC: COMMISSION
DECISION of ON THE STATE AID n° C 18/2009 (ex N 360/2009) implemented by
Belgium for KBC (2009-11-18)
Mark Pleas
[contact]
