Ljubljana: Slovenia’s default risk jumped after the country missed its target at a debt offering, reigniting concern that it will become the next euro nation to need international assistance.

The cost of protecting Slovenian debt against non-payment using credit-default swaps rose to the highest in a week on Wednesday, according to data compiled by Bloomberg. The yield on Slovenia’s dollar-denominated benchmark bond maturing in 2022 held above 6% after surging past that level Tuesday for the first time this month.

The Alpine nation is battling a deepening banking crisis as the second recession in four years swells the stock of bad loans at state-owned lenders such as Nova Ljubljanska Banka d.d. “The government will do everything in its power to make sure it doesn’t need a bailout," Prime Minister Alenka Bratusek said Tuesday after talks with European Commission president Jose Manuel Barroso.

“Bratusek’s comments were easily dismissed by the market, given the continued lack of detail on the bad bank plan and on fiscal consolidation," Abbas Ameli-Renani, an emerging-markets strategist at Royal Bank of Scotland Plc in London, said in an e-mail. “Yesterday’s poor auction was reflective of the low appetite in the local banking sector for government T-bills."

Creditworthiness worsens

Credit-default swaps (CDS), which reflect the perception of the nation’s creditworthiness, advanced 15 basis points to 359 basis points on Wednesday. CDS reached a six-month high of 412 basis points on March 28, according to data compiled by Bloomberg.

The yield on the benchmark dollar bond, which dropped to a two-week low of 5.6% on 5 April, surged 58 basis points in the past two days to 6.28% as of 3.14pm in the capital, Ljubljana.

Slovenia sold €56 million ($73.4 million) in Treasury bills Tuesday, missing its auction target by almost half as borrowing costs rose. It sold six-month notes at 1.7% and one-year bills at 2.99%, according to an e-mailed statement from the finance ministry, which sought to raise €100 million.

Bad sign

“The auction result doesn’t bode well for the government’s ability to roll over 900 million euros of bills maturing in June," Ameli-Renani said.

With bond yields approaching levels that prompted bailouts of other euro nations, Bratusek on Tuesday repeated a pledge to press on with a recapitalization plan valued at as much as €4 billion and to extend fiscal-consolidation measures.

The European Commission warned of excessive risks to the economic health of Slovenia and Spain, calling on both governments to take urgent action to stem the spread of the euro crisis.

Political gridlock and legal snags have prevented Slovenia from addressing its imbalances adequately and enhancing its adjustment capacity, thus increasing its vulnerability at a time of heightened sovereign funding stress in Europe, the EU’s executive arm said on Wednesday in Brussels.

Bratusek will meet Slovenian party leaders today at 6pm in Ljubljana to discuss the possibility of putting a debt limit into the constitution, according to a statement on the cabinet’s website. She will also brief them on talks with EU officials in Brussels on Tuesday.

Bailout concerns

“Concerns over Slovenia potentially becoming the next euro zone country to request a bailout have not completely dissipated," Otilia Simkova, an economist at Eurasia Group in London, said in an e-mail on Tuesday. This has been fed by the ambivalence of the new centre-left government on its commitment to key reforms.

Slovenia’s three largest banks, Nova Ljubljanska, Nova Kreditna Banka Maribor d.d. and Abanka Vipa d.d., will probably need as much as €2 billion of fresh capital, Fitch Ratings said on 5 April after it cut the credit score of some of the country’s lenders.

Slovenia would benefit from a precautionary deal with the European Union rescue mechanism as its bonds would be eligible for primary-market purchases, the Institute for International Finance said in a report.

“With the export-driven economy forecast to struggle with a recession this year and little progress in the government’s privatization efforts, general government debt could surge to over 80% of economic output by 2015," Jeffrey Anderson and Jessica Stallings from the Washington-based institute said.

Bad loans, stemming mostly from the collapse of the construction industry, represent a fifth of gross domestic product, the Organization for Economic Cooperation and Development (OECD) said on Tuesday.

State sales

The three-week-old government should sell state-owned lenders with debt holders taking some losses to avoid a severe crisis, the Paris-based OECD said in a report. Slovenia should recapitalize distressed viable banks with the state refraining from keeping a blocking minority shareholding and wind down non-viable institutions, it said.

“To those who’ve been speculating about Slovenia lately, I would say, please assess Slovenia through facts and figures," Bratusek said on Tuesday.

Slovenia needs to borrow about €3 billion this year to repay maturing debt, aid banks and finance the budget, the International Monetary Fund said on 20 March. About €1 billion of debt matures in June, according to data compiled by Bloomberg.

The country is facing a severe banking crisis, driven by excessive risk taking, weak corporate governance at state-owned lenders and insufficiently effective supervision, the OECD said.

“We don’t have an easy time ahead," Bratusek said. “Our first task is to stabilize the banking system and with the bad bank we’ll solve our first problem, and that will be in June." BLOOMBERG

Abigail Moses in London contributed to this story.

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