Slovenia begs “systemic questions” for the Euro


The Bank of Slovenia has prepared a special ?2 commemorative coin issued to mark the 100th anniversary of the birth of the national hero Franc Rozman, nicknamed Stane. He was a Slovenian Yugoslav partisan commander in the Second World War.

Slovenia begs “systemic questions” for the Euro

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In December 2013, the Slovene non-performing loans portfolio made 13,4% of total assets; as of April 2016, this bad portfolio has shrank to 8% and banking sector profits have rebounded significantly.

That is the end of good news. Slovenia could be as good a trigger as any for a looming banking crisis, with institutional as well as financial dimensions. The European Central Bank, the European Commission, the European Council, and the European Court of Justice are running out of good options.

Bail-in rather than bail-out

Slovene authorities recapitalized six major Slovene banks in December 2013 to the tune of €3bn, ultimately averting an international bailout.

To avert a bail-out, the government imposed a “bail-in” against all “subordinated” bondholders, leaving the Bank of Slovenia in the clear.

Investors lost everything, that is, €600mn. The Bank of Slovenia lost little, if anything. To small bondholders that did not go down well.

Was it legal?

The Court of Justice of the European Union (CJEU) failed on Tuesday to clarify whether the December 2013 bail-in that entailed wiping out subordinated bondholders in favour of the National Bank of Slovenia was legal.

It was a decision allowing both bondholders and the Bank of Slovenia to celebrate.

In a statement issued on Tuesday Slovenia’s central bank hails the recognition that the bail-in was legal. In this sense it appears that it is legally justified to bail-in a bank in order to safeguard the systemic integrity of the EU’s financial system.

But, how is the cost the bail-in to be shared is unclear.

In turn, the Association of Small Shareholders (VZMD) hails the (implicit) recognition that their property was in effect expropriated (nationalized) in 2013, in a manner that was “neither necessary nor unavoidable.” That means they could demand cost-sharing. And they will.

The ball is in Ljubljana

The bail-in was indeed declared legal by the CJEU. The ruling suggests the government did need to intervene. But, the government was under no obligation to heed a European Commission banking communication and wipe out only junior bond holders. The Court said the burden could be shared “to the extent necessary.”

The final decision will have to be made by Slovene justice in December. The Slovene Constitutional Court will have to rule whether bondholders must be compensated and by how much.

This provides scope on Slovene authorities to tighten their grip on the Slovene Central Bank. On July 6, the police raided several Ljubljana officers of the Central Bank. The police said in a statement that there were reasons to believe the Central Bank was fiddling with the valuation of banks to gain millions at the expense of subordinated bond holders.

The police suspects four Central Bank officials overstepped their mandate. Among them, is the Governor Bostjan Jazbec who seats on the European Central Bank’s governing council. The raid in the Slovene Central Bank on Wednesday resulted in the seizure of ECB documents as evidence.

Systemic protection but…

Much of this material comes from the bank’s internal network, that is, information protected by EU law. Mario Draghi protests that the pre-criminal investigations violated “the ECB’s privilege on inviolability of its archives.” He is consulting with the President of the European Commission Jean-Claude Juncker “to take any necessary follow-up steps,” Draghi said. But, if Slovene justice is to decide who is to foot the bill, they need evidence.

That also means that the government of Slovenia is now heading towards the privatization of the National Bank, which could be liable to pay millions to compensate small bondholders in the near future. That is not going to a have a positive effect on its valuation.

Alas, this is a small problem compared to the implications for Europe and the Euro.

Open questions for the Euro

What is clear is that neither the Slovene nor the European taxpayer will pick up the tab of compensation and “bail-in is bail-in.”

Therefore, the ECJ ruling reduced Slovenia’s benchmark 10-year bond yields to 16-month lows. That is good news, or not quite.

There are systemic considerations beyond Slovenia.

It will be harder for Italy to negotiate a national bail-out for its third largest systemic bank Banca Monte dei Paschi di Diena, and perhaps even UniCredit. That could see many bank bondholders sell-sell-sell in Italy, but also elsewhere. Deutsche Bank comes to mind.

(DW, Bloomberg, Reuters,

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