FYI | Apr 11 2013
– Slovenian bill auction a failure
– EC issues stern warning
– Here comes the next domino
By Greg Peel
On Tuesday night the government of the tiny former Yugoslav state of Slovenia, a eurozone member, sold E65m in T-bills. This would not be of any specific note except for the fact the Slovenian government was hoping to sell twice that amount. In the words of respected trader and commentator Dennis Gartman, the auction was an “acute failure”.
Last night the European Commission issued what the UK Guardian decribes as a “hard-hitting” report on the countries within the eurozone facing macroeconomic imbalances such as overvalued housing markets or hefty government debts. Well that would be just about all of them, and indeed 13 of 17 members were signalled out for warnings. Even the northern members France, the Netherlands and Belgium were signalled out for attention.
But the most urgent warnings were reserved for two members in particular – Spain, which we know about anyway, and Slovenia.
The last big correction in the global equity rally from the 2009 lows began in late September last year when it appeared Spain would be the next eurozone victim requiring of a troika bail-out. With Spanish bond yields rising precipitously on the open market, it was only a matter of time before high borrowing costs would force the country into bankruptcy. But then the ECB stepped in and declared it would do “whatever it takes” to protect the euro, which included the introduction of the outright monetary transactions (OMT) stand-by fund. As soon as Spain asked, a bail-out would be forthcoming from the OMT – money printing by any other name.
But as soon as the ECB made its declaration, traders exited their short Spanish bond positions. The yields collapsed and Spain’s borrowing costs fell back to levels at which it could sustain a Mexican stand-off of sorts. Given the far stricter austerity measures which would be required of a bail-out, the stand-off suited the Spanish government from the political viewpoint. As to whether the stand-off was economically sustainable was another case in point, but the world has since forgotten about Spain and moved on. Clearly the EC hasn’t forgotten.
On IMF numbers at end-2012, Spain is the fourth largest economy in the eurozone and the 13th in the world (Australia is 12th). To provide perspective, Greece is the 40th largest and Cyprus the 100th. In between, at 78th, is Slovenia.
Last month’s Cyprus “bail-in”, so called because it is partially funded by a tax on Cypriot deposits, caused global markets to stumble but not fall. Deposit levies were a new and sinister development, but after assurances that Cyprus provided a “unique” situation the global market breathed a sigh and moved on. Yet there are many who maintain that the “bail-in” is a very disturbing and potentially very dangerous development.
The Slovenian government has already been forced to bail out the country’s banks, thus establishing a partly state-owned banking system. The Slovenia issue is not akin to that of Cyprus, which created a “Little Switzerland” of a banking system far larger than its paltry GDP, nor Greece, where problems stem from government corruption and systemic tax evasion, but similar to Ireland, Portugal, Spain and Italy which have been struck down or are yet to be struck down by typically profligate bank lending in the run up to the GFC.
The EC warned in its report, the Guardian notes, that the close connection between Slovenia's partly state-owned banks, which made reckless loans during the boom years, and the country's public finances could jeopardise financial stability. "These challenges require urgent action in the areas of the financial sector, state-owned enterprises and microeconomic reforms in order to prevent a situation in which severe imbalances would steeply increase towards unsustainable levels," it said.
For Dennis Gartman, Slovenia is quite simply the next “cockroach”. Greece was the original cockroach, and wherever there is one cockroach there is invariably more. Hence Greece has been bailed out, Ireland has been bailed out, Portugal has been and may need to be again, Cyprus has been bailed in, Spain is merely holding off and Italy, which still has no government, is teetering.
Gartman suggests worse shall follow, “for once a country such as Slovenia makes it to the klieg-lit centre stage its ability to make good on its fiscal circumstances becomes more and more difficult as those who might have invested readily in the country in the past removed themselves at the margin… or in some instances, entirely… and worse comes to worst. It is the nature of this sort of thing”.
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