Slovenia can be the first to leave EU; Government Bond Yields rise above 7% for the first time since joining Euro

sloveniaSlovenia’s 10-year government bonds slid for a fourth day, with the yield topping 7 percent for the first time since the nation adopted the euro in 2007, as the debt crisis in Europe roils markets.
The yield rose to 7.14 percent at 1:05 p.m. in Ljubljana, according to Bloomberg data. Slovenia, which holds early elections next month, was cut by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings on the government’s collapse, the poor economic outlook and a weak banking industry. The former Yugoslav republic is also a victim of its “proximity” to Italy, which is struggling to fend off an investor crisis of confidence.

Bostjan Vasle, Slovenia’s chief economic forecaster, says Slovenia Must Tackle Debt as Recession Looms

Slovenia’s next government must cut public spending as the likelihood of the nation sliding into a recession because of the euro region’s debt crisis increases, according to the government’s forecasting institute.
Slovenes will vote on Dec. 4 after Prime Minister Borut Pahor’s government was toppled in a no-confidence vote on Sept. 20. Its failure to cut public spending and the rejection of the pension changes in June prompted credit rating companies to lower the country’s assessment.
The export-driven economy is faltering as demand in Europe weakens after governments embarked on spending cuts to allay investors’ concern over debt sustainability. Gross domestic product weakened to an annual 0.9 percent in second quarter from a 2.3 percent pace in the first three months.
“The key challenge for the new Cabinet will be to consolidate public finances,” Bostjan Vasle, the institute’s director told reporters in Ljubljana today. “We can’t rule out the possibility economic growth will be negative in some quarters as there are visible signs of an economic slowdown in Europe.”

It might be easier for the Slovenia to leave the EMU as it has not been bailed out by EFSF, IMF. Slovenia’s joining to EU was more a reasonless step and since its inception Slovenia has not gained much from it. Rather, its been more bad than good.

Leaving Euro would be a hard task if Slovenia waits more. There are problems which need to be dealt very cautiously while leaving Euro. For example, if someone has got a mortgage loan in Euro and his country disintegrates from EMU, then he will have to pay in the local currency which would mean that he will have much difficult time paying back his mortgages. Certainly, leaving Euro won’t be easy for any country but being with Euro would lead to nowhere either.

Hitesh Anand

I am a post graduate from Newcastle University, UK. I like studying and analyzing economic data and financial health of world.

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3 Responses

  1. Ales says:

    Oh, come on. I hope you are joking wright?!
    Slovenia got a lot good things by entering into EMU (from: credibility, easier access to other markets, lower interest rates….) There were also some bad things of course (the worst of all – inflation & cheap money what brought us like Spain and other countries into today – debt crises), but in total the acceptance of the EUR lifted Slovenian`s economy to a new level.

    Exit from EMU-probably, but not before the collapse of the EUR. For Slovenia is crucial to stay in EMU. We do have difficulties, but much smaller than countries like the PIIGS.

  2. Hitesh Anand says:

    Hi Ales
    You are right that Slovenia joined Euro and gained market access, low interest rates, etc. but in return got increased debts. If Euro collapses, which it will sooner or later, Slovenia would be back at the same place where it was before joining EMU, just with more debts and increased cost of borrowing. That wouldn’t be good in long run for Slovenia. Every EMU country, especially the peripheral ones, got easier access to markets and low interest rates for some time but now see what is happening in those countries with unsustainable debts levels and social unrest.
    Also, I would like to make a point that if Slovenia leaves Euro and restructures its debt sooner, it would be better for the country. If borrowing costs rises more and then a bailout is needed then it might get difficult for Slovenia to leave EMU. This is precisely what is happening to EU countries one after another. Levels of Slovenian bond yields are indicative of such repercussions.

  3. g says:

    well… I guess you were never actually in Slovenia and that your analysis is from Bloomberg data etc… 🙂
    EURZONE brakeup would be good for Slovenia, I agree…. However total debt (govie+Slovenian banks debt to foreigners) is less then 20pct of equity, therefore leverage is smallish compared to everyone else. However there are some country specific factors which paint a distorted picture… If there ever was a category “too small to fail” that is where Slovenia should be:)
    Our debt levels are too small and indebtness went into consumption past few years… That (besides politicians with no “balls”) is a problem…

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