Friday

26th Aug 2016

Markets punish Slovenia for political crisis

Slovenia's borrowing costs have reached 'bail-out territory' after lawmakers rejected the premier-designate, putting the euro-country on the line for further downgrades by ratings agencies.

Zoran Jankovic, the mayor of Slovenia's capital Ljubljana, fell four votes short of the 46 needed to be approved as prime minister by the parliament, with the country's president set to re-cast his name or propose someone new within two weeks.

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  • Markets have reacted negatively to the political problems in Ljubljana (Photo: European Commission)

Jankovic's Positive Slovenia - a centre-left party - won the most votes in snap elections in December after the government of Borut Pahor was toppled over pensions reform and budget cuts.

Slovenia, the first post-Communist nation to adopt the euro five years ago, needs to cut public spending to comply with new EU fiscal rules and the upcoming intergovernmental treaty on budget discipline. According to central bank governor Marko Kranjek, Ljubljana needs to cut some €1 billion to meet requirements.

Ratings agencies have already reacted to the prolonged crisis, with Moody's downgrading Slovenia to A1 in December and Fitch putting its AA- rating on "negative watch" with a possible downgrade due this month.

The borrowing cost on Slovenia's 10-year bond jumped above seven percent this week when compared to German bunds - an "unsustainable" territory attained last year by Italy and Spain, which prompted intervention from the European Central Bank.

Madrid fared well on Thursday in its bond sale, raising €10 billion, twice as much money as it planned, as domestic banks used money made available by the ECB to buy up government debt. The average yield on the three-year bond was 3.3 percent.

Italy also saw increased interest for its short-term papers on Thursday, raising €12 billion with an average yield of 5.9 percent, a good omen for the three-year bonds worth €2-3 billion planned for Friday.

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