Baluarte
05-04-2013, 11:45 AM
The European Union issued warnings to Slovenia and Hungary Friday to move swiftly if the countries want to restart economic growth as recession and perceived fiscal laxity are taking their toll in Central Europe.
The risks of inaction are different in each country.
Slovenia, considered by some the next candidate for a euro-zone bailout after Cyprus, needs to quickly recapitalize its indebted banks and promote both public and private deleveraging, said the European Commission, the EU’s executive arm.
Any further delays in creating a bad bank to take over non-performing loans in Slovenia’s troubled, state-run banking sector would be ominous signs, the commission said.
“Risks to growth are tilted to the downside. Further delays in resolving the banking crisis and restructuring the highly indebted corporate sector…would lead to a further deterioration of growth prospects,” the EU said in its latest economic forecast of the country.
The concern is based on thinking that if Slovenia doesn’t act, the recession will likely deepen, the banking sector mess could worsen and, as a result, lending may wane. That in turn would further weigh on future economic activity. In recent weeks, analysts have said that such a series of events would be a catalyst for a bailout.
Jaromir Sindel, economist at Citibank, said the key short-term risk for Slovenia is its ability to fund general government operations at a reasonable price.
Moody's MCO +3.63% earlier this week cut Slovenia two notches to Ba1 from Baa2, putting it into the “junk” or high-risk, category, in contrast with Standard & Poor’s and Fitch Ratings, which rate the country in the “investment-grade” or low-risk category.
Subsequent downgrades by other rating agencies could come if the government fails to deliver promised resolutions and that would potentially lock the country out of financial markets, Mr. Sindel said.
If more downgrades come, “the Slovenian banking sector would lose another source of financing that would worsen the credit crunch and would threaten the rollover of government treasury bills,” Mr. Sindel said.
With two of the three main ratings agencies still affirming Slovenia’s creditworthiness, the country was able to secure financing this week at prices well below the 7% yields its bonds fetched earlier this year.
Despite the Moody’s downgrade, Slovenia sold a $1 billion five-year bond, paying a 4.95% yield, and a $2.5 billion 10-year bond paying a 6% yield. Tuesday, it proposed initially a yield of 5% and 6.125%, respectively.
The EU said it expects Slovenia to need at least 1 billion euros ($1.31 billion) in cash, or 3% of gross domestic product, to recapitalize its banking sector, and that an additional €4 billion in state guarantees, or 11% of GDP, is needed for the bad bank that will take over non-performing loans.
Slovenia should post a fiscal deficit equal to 5.3% of GDP this year and a gap of 4.9% of GDP in 2014, the EU said. Both those figures are well above the EU’s 3% of GDP limit on deficits.
And in Hungary, inaction could lead to the loss of EU funds for the recession-plagued country.
The EU refuses to believe promises made by the government of Prime Minister Viktor Orban, which says it’s targeting a budget shortfall of 2.7% of GDP for both this year and next. The EU says the country’s fiscal gap will rise to 3.3% next year from an expected 3% this year.
Mr. Orban’s government has been widely criticized for its unorthodox fiscal policy measures, especially for hefty taxes on banking, retail, telecommunications and energy. Some analysts have said that the taxes don’t address Hungary’s long-term fiscal structure, but rather cover up fiscal laxity.
Mr. Orban Friday criticized the bloc’s treatment of Hungary, accusing Brussels of applying double standards and of being “unfair” regarding its Excessive Deficit Procedure, or EDP.
The bloc’s economics chief, Olli Rehn, Friday said Hungary could also be removed from EDP if its sticks to its promised fiscal policy path.
Mr. Orban said the EU should let Hungary out of the EDP, which is triggered when a country is running–or at imminent risk of running–a budget deficit above 3% of gross domestic product, if it were to follow its own principles.
“This issue isn’t about Hungary any more, Hungary cut its deficit to comply with EU requirements,” Mr. Orban said.
Hungary has been in the EDP since it joined the EU in 2004. Countries that flout the deficit rules can face sanctions and the loss of EU funds if limits are breached for a significant period of time.
Veronika Gulyas in Budapest contributed to this article.
Write to Sean Carney at sean.carney@wsj.com
The risks of inaction are different in each country.
Slovenia, considered by some the next candidate for a euro-zone bailout after Cyprus, needs to quickly recapitalize its indebted banks and promote both public and private deleveraging, said the European Commission, the EU’s executive arm.
Any further delays in creating a bad bank to take over non-performing loans in Slovenia’s troubled, state-run banking sector would be ominous signs, the commission said.
“Risks to growth are tilted to the downside. Further delays in resolving the banking crisis and restructuring the highly indebted corporate sector…would lead to a further deterioration of growth prospects,” the EU said in its latest economic forecast of the country.
The concern is based on thinking that if Slovenia doesn’t act, the recession will likely deepen, the banking sector mess could worsen and, as a result, lending may wane. That in turn would further weigh on future economic activity. In recent weeks, analysts have said that such a series of events would be a catalyst for a bailout.
Jaromir Sindel, economist at Citibank, said the key short-term risk for Slovenia is its ability to fund general government operations at a reasonable price.
Moody's MCO +3.63% earlier this week cut Slovenia two notches to Ba1 from Baa2, putting it into the “junk” or high-risk, category, in contrast with Standard & Poor’s and Fitch Ratings, which rate the country in the “investment-grade” or low-risk category.
Subsequent downgrades by other rating agencies could come if the government fails to deliver promised resolutions and that would potentially lock the country out of financial markets, Mr. Sindel said.
If more downgrades come, “the Slovenian banking sector would lose another source of financing that would worsen the credit crunch and would threaten the rollover of government treasury bills,” Mr. Sindel said.
With two of the three main ratings agencies still affirming Slovenia’s creditworthiness, the country was able to secure financing this week at prices well below the 7% yields its bonds fetched earlier this year.
Despite the Moody’s downgrade, Slovenia sold a $1 billion five-year bond, paying a 4.95% yield, and a $2.5 billion 10-year bond paying a 6% yield. Tuesday, it proposed initially a yield of 5% and 6.125%, respectively.
The EU said it expects Slovenia to need at least 1 billion euros ($1.31 billion) in cash, or 3% of gross domestic product, to recapitalize its banking sector, and that an additional €4 billion in state guarantees, or 11% of GDP, is needed for the bad bank that will take over non-performing loans.
Slovenia should post a fiscal deficit equal to 5.3% of GDP this year and a gap of 4.9% of GDP in 2014, the EU said. Both those figures are well above the EU’s 3% of GDP limit on deficits.
And in Hungary, inaction could lead to the loss of EU funds for the recession-plagued country.
The EU refuses to believe promises made by the government of Prime Minister Viktor Orban, which says it’s targeting a budget shortfall of 2.7% of GDP for both this year and next. The EU says the country’s fiscal gap will rise to 3.3% next year from an expected 3% this year.
Mr. Orban’s government has been widely criticized for its unorthodox fiscal policy measures, especially for hefty taxes on banking, retail, telecommunications and energy. Some analysts have said that the taxes don’t address Hungary’s long-term fiscal structure, but rather cover up fiscal laxity.
Mr. Orban Friday criticized the bloc’s treatment of Hungary, accusing Brussels of applying double standards and of being “unfair” regarding its Excessive Deficit Procedure, or EDP.
The bloc’s economics chief, Olli Rehn, Friday said Hungary could also be removed from EDP if its sticks to its promised fiscal policy path.
Mr. Orban said the EU should let Hungary out of the EDP, which is triggered when a country is running–or at imminent risk of running–a budget deficit above 3% of gross domestic product, if it were to follow its own principles.
“This issue isn’t about Hungary any more, Hungary cut its deficit to comply with EU requirements,” Mr. Orban said.
Hungary has been in the EDP since it joined the EU in 2004. Countries that flout the deficit rules can face sanctions and the loss of EU funds if limits are breached for a significant period of time.
Veronika Gulyas in Budapest contributed to this article.
Write to Sean Carney at sean.carney@wsj.com