Slovene Government Ignores ECB Warning With Draft Bailout Law

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(Bloomberg) -- Slovenia’s government approved a final draft of a law aimed at protecting investors who lost money during a 2013 bank bailout, ignoring warnings from the European Central Bank that it will breach euro-area rules.

The controversial law is at the center of a criminal probe and lawsuits frominvestors who allege the central bank wrongly wrote off hundreds of millions of euros in stocks and bonds held in banks that were rescued with 3.2 billion euros ($3.6 billion) of taxpayers’ money. The European Central Bank and the Bank of Slovenia have both criticized the draft for putting any burden of reimbursing investors on the central bank rather than the government.

The draft approved by the government will be submitted to parliament on Wednesday, Finance Ministry State Secretary Metod Dragonja told journalists in Ljubljana Tuesday. He said the law should be passed by July at the latest. When asked if he expects a lawsuit at the EU level because the government ignored the ECB’s warnings, he said "escalation is possible."

"The Bank of Slovenia is protecting its reserves, while the Finance Ministry is protecting the budget," Dragonja said. He added that he didn’t expect compensation to exceed the bank’s reserves, which currently stand at 909 million euros ($1 billion). The rescue, which was approved by the European Commission and the European central bank, wrote off 963 billion euros in bonds and stocks so that investors would share some of the burden with taxpayers.

While Slovenia, nation of 2 million people, is one of the smallest euro area members, the law may have far reaching consequences for the currency bloc. If approved, the legislation could set a precedent that may undermine efforts to make investors share the burden of financial-sector rescues across the single-currency zone.

Central Bank Governor Bostjan Vasle wrote an open letter to Prime Minister Marjan Sarec on Monday slamming the draft, saying that it would violate the fundamental principals of its mandate and break rules on illicit monetary financing. Last week, the ECB said euro-area members "may not put their central banks in a position where they have insufficient financial resources."

Pressure on the central bank has risen this year, with the nation’s Court of Audits inspecting its books to assess whether the 2013 bailout -- which was approved by both the European Commission and the ECB -- was done properly.

Prosecutors are probing abuse-of-office allegations against Vasle’s predecessor, Bostjan Jazbec, and his former team over their role in the bailout. The European Commission has also sued Slovenia for seizing European Central Bank documents in a raid at the central bank in Ljubljana three years ago as investigators looked into its role in bank bailouts. Jazbec and the central bank deny any wrongdoing.

©2019 Bloomberg L.P.

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