Slovenia, struggling to avoid becoming the eurozone's next bailout case after Cyprus, raised more than twice as much as planned in a treasury bill tender on Wednesday aimed at easing pressure on its finances.
With investors increasingly skeptical that the small eastern European state can deal with its troubled banks on its own, the finance ministry used the proceeds to buy back a large tranche of debt maturing on June 6.
The move should buy time for the four-week-old government to unveil a plan to heal its state-owned lenders, sell public assets and push through budget cuts in a bid to restore market confidence and borrow the rest of the funds it needs to stay solvent later this year.
The ministry sold 1.1 billion euros ($1.4 billion) of 18-month treasury bills at a yield of 4.15 percent, more than doubling its plan to place 500 million euros of the paper but paying around three times as much as bailed-out Portugal did last month to borrow over the same period.
The finance ministry then used some of the proceeds to buy back 510.7 million euros of similar bills early and at a small discount.
The operation appeared to calm nerves. The cost of insuring Slovenian debt against default through five-year credit default swaps fell by 16 basis points on the day to 350 bps.
“It was a good idea to refinance most of the debt that would mature in June now so as to reduce uncertainty on the markets,” said Saso Stanovnik of investment firm Alta Invest. “However, Slovenia will have to tap international markets by the end of this year and that will be the real test.”
Wednesday's deal rolled over a large part of the debt Slovenia has maturing this year, the finance ministry said, although several redemptions of smaller issues of short-term treasury bills are coming due from May onwards.
Analysts have said the operation was most likely pre-arranged with Slovenia's three big banks NLB, Abanka Vipa, and Nova KBM, in which the state is either the majority or a strategic stakeholder. NLB told Reuters it alone had bought 295 million euros worth of the bills sold.
It is the banks that are at the center of Slovenia's problems, choking on some seven billion euros worth of bad loans which officials must find a way to cover or, as in Cyprus earlier this month, let banks fail. Prime Minister Alenka Bratusek's government says it needs to find one billion euros for the banks and another two billion to keep the state itself afloat.
“The strong demand at today's sale gives the government some breathing space,'' said Nicholas Spiro, head of London-based Spiro Sovereign Strategy. “Still, the increased reliance on the country's banks to meet the state's funding needs accentuates the negative feedback loop between a vulnerable sovereign and an even more vulnerable banking sector.”
Since taking power after a center-right coalition collapsed following protests against corruption and austerity, Bratusek's four-party coalition has faced criticism from Brussels and the OECD club of wealthy nations for moving too slowly to shore up the export-reliant economy with a population of two million.
The yield on Slovenia's 10-year benchmark bond eased to 6.8 percent on Wednesday but was still two percentage points higher than a month ago and near the red-line of roughly seven percent at which other eurozone members have had to ask for a bailout.
Alone among the European Union's ex-Communist members, Slovenia has refused to sell the banks, a policy that has led to bad management, disastrous lending and three waves of taxpayer funded bailouts since the 1990s. The government plans to start moving many of the failing loans to a “bad bank” in June and then spend some one billion euros to recapitalize the banks.
Bratusek has also promised to introduce cost cutting and launch at least one major privatization at the end of next week to raise cash and address concerns that the economy - dominated by publicly-owned companies - relies too much on the state.
But diplomats and analysts say decades of resistance by Slovenia's political elite to selling state assets may pose obstacles and complicate the bank cleanup.
“I don't think Slovenia is out of the woods yet, what the market will want to see now is a pretty detailed reform program,” said Tim Ash, emerging market analyst at Standard Bank. “Slovenia's own track record of state ownership leaves a major question mark as to whether they will push ahead aggressively enough with state asset sales.”