Once heralded as a model for post-communist economic development, Slovenia is now seeking to avert an impending funding crisis on Wednesday with a bond auction that it hopes could help it avoid becoming the sixth euro zone nation to need a bailout.
The latest test of faith in the Slovenian economy will come this morning as the country conducts a bond auction to meet its near-term financial obligations.
The Slovenian finance ministry hopes to auction around 500 million euros ($ 650 million) worth of 18-month treasury bills Wednesday to use the funds to buy back 885 million euros worth of debt maturing on June 6 . The ministry said last Thursday that it would offer to buyback the bills at 99.525 percent of their face value.
If successful, the move could buy the center-left cabinet led by Prime Minister Alenka Bratusek more time to restructure and recapitalize the country's banking sector which holds toxic assets equal to around 20 percent of gross domestic product.
(Read More: Slovenia Faces 'Severe Banking Crisis': OECD )
Slovenia's borrowing costs have risen since Cyprus' banking bailout unnerved investors and was widely seen as a precursor to a possible rescue for Slovenia. Over the past month, the yield on Slovenia's ten year bond has risen above 7 percent. On Wednesday, the ten year was trading at 6.99 percent, up from 5.29 percent a month ago.
(Read More: Germany's Steinbrueck: Another Cyprus Can't Be Ruled Out )
"[Today's] bill auction has a higher chance of success if the state leans on its banks to purchase its debt. Yet this would smack of desperation and would throw the scale of Slovenia's funding challenge into even sharper relief," Nick Spiro, head of Spiro Sovereign Strategy, told CNBC.
"More worryingly, it would draw attention to the lethal embrace between the sovereign and the state-run banks. This "doom loop" will become even more pronounced once the banks are recapitalized and restructured - with or without external support."
"What is most alarming is that Slovenia's debt market has been taking a pounding at a time when sentiment towards other vulnerable euro zone sovereigns , even Portugal, has remained extremely favorable," Spiro added.
The government announced the plans for the early rollover of debt maturing in an attempt to calm market fears that the country could soon need a bailout. However, parliament postponed a vote on austerity measures and European Union rules on budget deficits, prompting concerns that the country is resisting inevitable spending cuts and putting itself further into a financial mess.
The International Monetary Fund cut its growth forecast for Slovenia last month, forecasting that the economy would contract by 2 percent in 2013, down from a 0.5 percent decline projected six month ago. It said that the country could return to positive growth in 2014, only "upon implementation of reforms and continued market access as well as a recovery in the euro area."
"Slovenia, the wealthiest central and east European member of the European Union, is now the most vulnerable sovereign debt market in the euro zone," Spiro said. "The country's political and business elites have done their best to put off the day of reckoning... [but] Slovenia is veering dangerously towards a bail-out," he remarked.
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