Slovenia rallies on bank recap plan
Slovenia's CDS spreads rallied today after the sovereign released results of its asset quality review and stress tests.
A capital shortfall of €4.8bn was identified, and the government will need to inject €3bn (€2.1bn in cash and €900m in government bonds) into the country's three largest state-owned banks. The government is confident it can do this without external help, and the markets seem to agree. Slovenia's CDS spreads rallied 20bps to 262bp, their tightest level since March.
Slovenia's debt-to-GDP ratio will rise from 54% in 2012 to 75.6% after the recapitalisation of the banks. This is considerable but should be manageable in the near-term. Subordinated bondholders have also been bailed-in, as has become the norm in such situations in Europe.
Overall, this is a positive development for Slovenia and the eurozone as a whole. But Slovenia still faces the problem of a state sector that is too large and inefficient, and the lack of external oversight may dampen its appetite to reform.
Slovenia's news had little impact on the broader market, with investors beholden to expectations of QE tapering. The Federal Reserve meeting next week will be crucial, though the markets seem more comfortable with the prospect of the Fed taking a step back than they were earlier this year.