Slovenia won’t join the club of bailout countries, Morgan Stanley

While the cost of supporting the banks may be higher than the government has envisaged, Slovenia will not join the club of the bailout countries in the near term, according to Morgan Stanley.

“The announced bond issuance provides a window to implement the reform agenda. Still, with implementation risks looming, risk/reward is unattractive, in our view,” the bank said.

Slovenia’s fiscal metrics do not look too alarming but the official debt/GDP ratio (54%) likely underestimates its true fiscal vulnerability to some degree, due to contingent liabilities.

Slovenia’s key macro challenge is its weak banking system (mostly state- owned), which suffers from poor asset quality. This raises the risk of costly bank recapitalisations being needed.

“We estimate borrowing needs at €2.3bn to secure funding for the rest of the year. The announced issuance could secure this, but the funding challenge in 2014, at EUR5.7 billion, remains large,” it added.

Key risk events ahead include convergence programme by mid-May, privatisation programme also by mid-May and details on its BAMC by June. Failure to show convincing progress on any of these markers may disappoint market participants.

“We find the risk/reward unattractive, with implementation risks and large funding needs for next year keeping pressure on bond spreads. We will monitor the near-term risk events closely and look to strengthen our current cautious stance, should the announced plans remain short of our expectations,” Morgan Stanley advised.

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