Slovenia looks to avoid EU bailout with early debt buyback

LJUBLJANA (Reuters) - Euro zone member Slovenia, struggling to avoid becoming the currency bloc's next bailout case after Cyprus, will attempt an early rollover of debt on Wednesday to calm markets and ease pressure on its finances.

If successful, the move could buy time for Prime Minister Alenka Bratusek's four-week-old government to clean up its loss-making state-owned banks, sell public assets and push through austerity steps to cut the swollen budget deficit.

Following last month's chaotic rescue of Cyprus, Ljubljana's borrowing costs have jumped close to the 7 percent threshold at which finances can become unsustainable, complicating its need to borrow to fund its budget deficit.

With markets speculating on how much cash the government holds in its coffers - Finance Minister Uros Cufer says it has enough money to stay solvent until October - that poses a problem ahead of a short-term debt redemption slated for June 6.

But the ministry has created a plan in which it will auction 500 million euros (426.3 million pounds) of 18-month treasury bills and then, probably tapping some of its cash reserves, buy back 855 million euros of the bills coming due at a small discount.

Analysts have said the operation was most likely pre-arranged with Slovenia's three big banks NLB, Nova KBM and Abanka Vipa, which are in majority or major state ownership, but that it would provide only a limited amount of breathing room.

"A successful auction would indeed do away with the immediate (financial market) threat, but the respite would be at best temporary," said Otilia Simkova, an analyst of the Eurasia Group.

"The need for bank recapitalisation and ongoing deficit financing present additional constraints, which are likely to send the government back to the market soon again," she added.

The yield on Slovenia's 10-year benchmark bond was up at 6.96 percent. The yield on the same bond was 4.77 percent on March 15, the day before the Cyprus bailout deal.

Slovenia's last bond issue dates back to October when it sold a $2.25 billion bond with a yield of 5.7 percent.

BORROWING SQUEEZE

Slovenia is the only former ex-communist European Union member that has not sold its major banks so the taxpayers now have to cover most of the bad loan bill. The state controls about 50 percent of the entire economy through direct or indirect ownership of other firms.

Ljubljana has to borrow some 3 billion euros this year to repay maturing debt, cover the budget deficit and fix state banks burdened by bad loans, nursing the lion's share of 7 billion of bad loans in the entire sector.

Cufer, the finance minister, has said it can wait until October before issuing new bonds. Banking Association head France Arhar said last week the government still had deposits of about 2 billion euros in local banks.

But persistent uncertainty over exactly how much cash the government has at hand has spooked foreign investors, who are waiting for evidence that the government will make good on its pledges to tackle reforms.

Timothy Ash, an analyst at Standard bank, said few foreigners would take part in Wednesday's auction because of low yields - the original bills carried a 3.99 percent coupon - but it could act as a springboard for more financing.

"If the T-bill auction and buy-back is successful, they should follow this up quickly with an effort to tap the Eurobond market, to get cash in the banks," Ash added.

Among other pledges, Bratusek has promised to launch at the end of next week the privatisation of at least one big state-owned firm, possibly a bank.

The government also aims to start moving some of the non-performing loans burdening the three state lenders to a "bad bank" by June and to recapitalise them with around 1 billion euros in cash this year.

But diplomats and analysts say decades of resistance by Slovenia's political elite to selling state assets may pose obstacles, complicate the bank cleanup and potentially tip the country of 2 million people into insolvency.

(Editing by Michael Winfrey/Jeremy Gaunt)