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Ernst & Young Believes Slovenia May Need Bailout

Ljubljana, 28 September (STA) - Slovenia's GDP will contract by 1.7% this year as growth prospects have been undermined by budget cuts, before a weak return to growth in 2013, Ernst & Young consultancy projects in its September eurozone forecast. It believes a resort to EU bailout assistance is $increasingly likely$.

Although Slovenia's credit ratings remain in investment grade, rating agencies have expressed serious doubt as to whether the current fiscal strategy can continue without IMF assistance and/or a debt relief program sponsored by the IMF and the EU.

Debt refinancing costs had risen sharply even before the latest rating changes, with the relatively low public debt no longer reassuring investors because of the speed with which it has risen, and the scale of further increase implied if any bank requires a rescue, the forecast suggests.

The government continues to argue that additional spending cuts are enough to correct the fiscal imbalance and avoid the need for external assistance. But the continued fall in GDP means that the deficit will drop only to about 4.5% of GDP this year, too large to achieve any reduction in debt service costs.

Since budget cuts slowed down growth, there is "a clear risk of financial strains triggering a request for a bailout, even if the latest package of budget reductions can be steered through," according to the forecast.

But Ernst & Young believes a bailout could be arranged "without much difficulty" considering that Slovenia's economy is equal to less than 0.5% of eurozone GDP.

"Whether or not it accepts a bailout, the government will only persuade creditors that it has a lasting way out of the crisis if it can enact structural reforms that permanently improve the competitiveness of exports," the report says, highlighting opposition to pension and labour market reform that will have to be overcome.

Because concern is now shifting from public finances to the balance sheets of the big banks, it is possible that a rescue could take the form of direct ECB assistance rather than emergency IMF/EU loans.

"Direct bank assistance could be offered more quickly (and is reportedly already under way), and might initially avoid the imposition of new demands on the government. But if it continues, the EU is likely to insist that it is accompanied by further structural reform."

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