Speculation mounts over Slovenian bailout

Slovenia's creditworthiness is deteriorating at the fastest pace in the world after Cyprus as investors speculate a banking crisis will force it to follow the island nation and become the sixth euro country to need aid.

Credit-default swaps insuring Slovenian debt for five years soared as much as 66 percent to a six-month high of 414 basis points on March 28th from 250 on March 15th, the last trading day before Cyprus announced plans for its rescue.

It's now up 34 per cent at 336 basis points, compared with a 45 per cent increase for Cyprus and 18 per cent for Portugal in the period.

Slovenia's two-week old government is struggling to prop up banks hit by recession and saddled with bad loans worth about a fifth of the country's economic output.

Cyprus, which accounts for 0.2 per cent of the euro region's economy, was forced to inflict unprecedented losses on uninsured depositors and senior bondholders as part of the €10 billion rescue of its financial system.

"Since the Cyprus resolution, Slovenia has been in the spotlight," said Bas van Geffen, an analyst at Rabobank International in Utrecht, Netherlands. "The country's smallness is now clearly a drawback in the post-Cyprus era, which has fueled speculation that the country might be the next Cyprus."

Credit-default swaps on Slovenia, which accounts for 0.4 per cent of the euro economy, have surpassed those for Spain, Italy and Croatia. The latter was approved to be the 28th member of the European Union last week.