ECB Coordinates With Fed to Lend Dollars to Euro-Area Banks

The European Central Bank said it will lend dollars to euro-area banks in a series of three-month loans as the region’s debt crisis limits market access to the U.S. currency.

The Frankfurt-based ECB said it will coordinate with the Federal Reserve and other central banks to conduct three separate dollar liquidity operations to ensure banks have enough of the currency through the end of the year. The three-month loans are in addition to the bank’s regular seven-day dollar offerings and will be fixed-rate tenders with full allotment, the ECB said in a statement today. They will be offered on Oct. 12, Nov. 9 and Dec. 7.

The euro jumped more than a cent against dollar after the announcement and traded at $1.3854 at 5:14 p.m. in Frankfurt. Stocks rose and Treasuries fell, pushing 10-year yields up the most in more than three weeks.

“The market focus on this as a problem is way over the top,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This is not a Lehman event. Extending the term to three months today is a clever way to show the central bank authorities are on the case.”

Two Banks

Two banks this week borrowed dollars from the ECB in its seven-day operation, a sign they are finding it difficult to access the U.S. currency in markets as the debt crisis makes financial institutions more wary of lending. The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years. It declined after the ECB’s announcement today.

The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 80.25 basis points below the euro interbank offered rate, or Euribor, at 4:15 p.m. in Frankfurt. It widened to as much as 112.6 basis points earlier this week, the most since Dec. 2, 2008, according to data compiled by Bloomberg.

“The ECB is seeing the stress in the dollar markets right now,” said Benjamin Schroeder, a rate strategist at Commerzbank AG in Frankfurt. “If there was really a big problem you’d see more demand in the seven-day tender. The ECB is trying to prevent things from getting out of hand.”

BNP Paribas Surges

The ECB yesterday allotted $575 million in its seven-day dollar operation, without naming the banks it lent to. French banks Societe Generale SA and BNP Paribas SA said yesterday they didn’t borrow dollars from the ECB.

BNP Paribas, France’s biggest lender, rose as much as 22 percent in Paris trading after today’s ECB announcement. BNP Paribas shares were up 5.57 euros, or 21 percent, to 32.47 euros as of 3:18 p.m.

Moody’s Investors Service yesterday cut the long-term credit ratings of Credit Agricole SA and Societe Generale, France’s second- and third-largest banks, and put BNP Paribas on review for a possible downgrade, citing the risks posed by their investments in Greece. Moody’s also said it will evaluate the impact of tighter financing markets on French banks.

While the ECB’s provision of liquidity helps to ease tensions in money markets, “the root is the debt crisis, and that will remain on the table for a long time,” said Marco Valli, chief euro-area economist at UniCredit Group in Milan. “The ECB could decide to extend refinancing operations to 12 months or resume the covered-bond purchase program.”

Strains Continue

The ECB last introduced a three-month dollar loan in May 2010 to calm markets roiled by the threat of a Greek default.

The ECB has been lending banks as much euro cash as they need at its benchmark rate since October 2008, when the collapse of Lehman Brothers Holdings Inc. triggered a global recession. It has been forced by the debt crisis to extend those measures and last month reintroduced an unlimited six-month euro loan.

The ECB’s dollar loans tackle “one small problem in the market at the moment,” said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets Europe in London. “Ultimately, until there’s a more comprehensive response to the sovereign debt crisis, which has been feeding into concerns about the health of European banks, the strains in Europe’s banking sector will continue.”

Resistant Tuberculosis Sweeps Across Europe at ‘Alarming Rate’

Drug-resistant tuberculosis is spreading at an “alarming rate” in Europe, the World Health Organization said as it introduced a plan to fight the disease that may save 120,000 lives and as much as $12 billion.

Reported cases of extensively drug-resistant tuberculosis in the region tripled in 2009 from 2008 levels, and the six countries with the world’s highest rates of patients with the most dangerous drug-evading form are all in Europe, the WHO said in a statement yesterday.

The London borough of Brent, home to Wembley Stadium and the headquarters of brewer Diageo Plc, has become western Europe’s tuberculosis capital, with more new cases each year than Karonga district in Malawi, a rural area still battling leprosy, according to the U.K.’s Health Protection Agency.

“This problem is a man-made phenomenon resulting from inadequate treatment or poor airborne infection control,” Hans Kluge, a special representative on drug-resistant tuberculosis in the WHO’s European region, said in the statement. “We need wide involvement to tackle the damage that humankind has done.”

European nations aim to diagnose at least 85 percent of patients with multidrug-resistant TB in Europe, and treat at least 75 percent of them by 2015, the Geneva-based WHO said. They will commit to national action plans that include dedicated facilities and improved public awareness, according to the agency. Of about 81,000 cases in 2009, the WHO estimates 34 percent were diagnosed and 22 percent were treated adequately.

Achieving the goals may prevent as many as 263,000 cases of drug-resistant TB, saving 120,000 lives and $5 billion in lost productivity. A further $7 billion may be saved by averting future cases, the WHO said.

Libya Council Forces Attack Sirte as U.K., France Pledge Aid

Libyan opposition forces battled for control of Sirte, Muammar Qaddafi’s birthplace, as the leaders of the U.K. and France pledged aid to the country’s new rulers during a visit to Tripoli.

Anti-Qaddafi forces withdrew to the outskirts of Sirte, one of the last holdout cities, after a day of fighting, Al Jazeera television reported today, citing Yousif bin Yousif, an opposition commander. The Misrata Military Council said earlier its forces took control of the entrances to the city and units started searching for officials loyal to Qaddafi.

The withdrawal is to “prepare for an invasion of the city in the next few hours,” bin Yousif told Al Jazeera. “It’s a military tactic.”

U.K. Prime Minister David Cameron and French President Nicolas Sarkozy became the first foreign leaders to visit Tripoli since helping opposition forces oust Qaddafi last month. They said they would push at the United Nations Security Council today for the adoption of a resolution releasing more Libyan assets frozen under sanctions against Qaddafi.

“This is not finished, this is not done, this is not over; there are still parts of Libya under Qaddafi’s control,” Cameron told a joint news conference in the Libyan capital yesterday. “We will help you to find Qaddafi and bring him to justice.”

Leaders Cheered

Television pictures showed Cameron and Sarkozy being cheered as they visited a Tripoli hospital. They later addressed a crowd on Freedom Square in Benghazi, Libya’s second city. Britain is unfreezing 600 million pounds ($950 million) of Libyan assets, Cameron’s spokesman, Steve Field, told reporters in London.

The Misrata council said earlier yesterday that Qaddafi loyalists were surrounded in an insurance building in Sirte’s city center.

Elements of the 32nd Brigade -- the special forces unit commanded by Qaddafi’s son Khamis and tasked in the past with protecting the former Libyan dictator -- were trapped in beachfront villas, it said.

The Misrata council said the Sirte attack was carried out with 900 technicals, the pickup trucks carrying machine guns or rocket launchers.

‘It’s Over’

“The message to Qaddafi and all those still holding arms on his behalf is that it’s over, give up, the mercenaries should go home,” Cameron said. “It’s time for him to give himself up. It’s time for the Libyan people to get the justice they deserve.”

“People have constantly underrated and underestimated the National Transitional Council; people said they couldn’t unite Libya, they were too tribal,” Cameron said, speaking alongside NTC Chairman Mustafa Abdel Jalil and Prime Minister Mahmoud Jibril. “It has been an impressive transformation. The roads are full, your water is flowing and your hospitals are working.”

Sarkozy said airstrikes against pro-Qaddafi forces “will continue as long as Libyan leaders think Libyan people are in danger.”

The new leaders of Libya are seeking to build a country where there is a “rotation of power and the abandoning of terrorism,” Abdel Jalil said. “We aspire for freedom to prevail over all Libyan soil and for the arrest of Muammar Qaddafi alive and his trial.”

‘No Kickbacks’

Asked whether their intervention had been influenced by a desire to get at Libya’s oil wealth, Sarkozy said “there were no kickbacks, no hidden agreements to access Libya’s resources. We did what we thought was fair.”

If Libya’s new leadership chooses to work with French companies, “it will be good. But it has to be done according to the rule of law, through tenders,” he said.

Giving details of the U.K. aid, Cameron’s spokesman said Britain will send two soldiers to work with the U.S. and Libyans on securing weapons belonging to the Qaddafi regime. Their focus will be “small surface-to-air missiles,” Field said.

Britain is also sending 1 million pounds ($1.6 million) to agencies working on weapons decommissioning and 600,000 pounds ($950,000) to the Mines Advisory Group to support its work disposing of explosives and land mines. Police in Benghazi will get communications equipment valued at 60,000 pounds ($95,000), and the U.K. is offering forensics advice to those looking for evidence of human-rights abuses.

‘Courage of Lions’

In Benghazi, the initial center of the rebel movement, Cameron told cheering crowds that they had inspired the world.

“Your city was an inspiration to the world as it threw off a dictator and chose freedom,” he said. “Colonel Qaddafi said he would hunt you down like rats, but you showed the courage of lions, and we salute you.”

Sarkozy said that “the future of Libya resides in a united Libya and not a divided Libya.”

Libya said 18 out of 19 ports were now “operational,” according to a notice to the UN’s shipping agency from the NTC about the ports’ status was published on the website of Inchcape Shipping Services yesterday.

The North African country will resume crude exports within three or four days, the nation’s representative to a meeting of Arab central bank governors in Doha said yesterday. Output will be about 700,000 barrels a day by the end of this year and an estimated 1.6 million barrels a day by the end of 2012, Abdulla Saudi told reporters in the Qatari capital.

Draft Resolution

The U.K. has put forward a draft resolution to the UN Security Council to end an asset freeze on Libyan National Oil Corp. and Zueitina Oil Co., according to a Western diplomat who spoke on condition of not being identified. The 15-member body may vote on the measure today.

The resolution also would authorize the Central Bank of Libya, the Libyan Foreign Bank, the Libyan Investment Authority and the Libyan Africa Investment Portfolio to use their assets for specified purposes. Those include purchases of humanitarian aid; fuel, electricity and water for civilian use; and the strengthening of Libya’s government and economy.

Ferrari Proves Recession Proof as Ultra-Luxury Sells Out: Cars

Maserati SpA’s new sport-utility vehicle was one of the most sought-after models at the Frankfurt car show this week and Ferrari SpA predicted record sales as executives said ultra-luxury remains recession-proof.

“If you go to the Ferrari stand, there aren’t any customers worried about the recession,” Fiat Chief Executive Officer Sergio Marchionne said at the International Motor Show. “The last Ferrari customers I saw at the show weren’t crying.”

Fiat’s two upscale brands may help the Turin, Italy-based carmaker weather a decline at its main business as Europe’s credit crisis worsens. Even without the Kubang SUV, Maserati aims to boost deliveries by almost eightfold to 45,000 cars in 2014 as it increases dealers by 150 percent worldwide. Lamborghini SpA’s new Aventador model is sold out for 18 months and Rolls-Royce Cars announced a 10 million-pound ($15.8 million) expansion at its Goodwood, England plant.

Ferrari expects to deliver 7,000 cars in 2011 on demand for its first family car, the $356,000 four-seat FF that came to market this year. Fiat’s most profitable unit plans to cap sales at 7,000 going forward to maintain exclusivity. Ferrari targets “significant” results this year after earnings before interest and taxes rose 23 percent in 2010 to 302 million euros ($414 million) on revenue of 1.92 billion euros, Chairman Luca Cordero di Montezemolo said.

“I’m not worried because we have quality, exclusivity, a strong brand and innovative technology,” Montezemolo said in an interview when asked about the effect of the economic slowdown.

Mixed Fortunes

The ultra-luxury optimism stands in contrast to concern voiced from volume carmakers that a worsening debt crisis in Europe is prompting consumers to rein in spending. PSA Peugeot Citroen CEO Philippe Varin said this week that Europe is facing a possible recession, while Ford Motor Co. said sales in the region next year will be little changed.

Bayerische Motoren Werke AG, the world’s biggest maker of luxury cars, is the best performer in the Stoxx 600 Automobiles & Parts Index this year. BMW stock has slipped 6.4 percent, compared with a 24 percent loss for the index. Fiat, which also owns Chrysler Group LLC in the U.S., is the worst performer on the index, with a 42 percent decline.

Sales of the main high-end European luxury brands -- Maserati, Lamborghini, Ferrari, Bentley, Rolls-Royce and Aston Martin -- will rise 19 percent this year to 28,090 vehicles, and gain another 13 percent in 2012, according to a forecast from industry analyst IHS Automotive.

“The rich have gotten richer and the number of millionaires in emerging countries is really growing so the demographic trend is very positive” for the ultra-luxury carmakers, said Erich Hauser, a London-based Credit Suisse automotive analyst. “Things would have to get very nasty before they face a problem.”

Rolls-Royce Record

Rolls-Royce, owned by BMW, expects in 2011 to break last year’s sales record of 2,711 cars, Chief Executive Torsten Mueller-Oetvoes said, adding that China may overtake the U.S. as its top market.

The German executive said he’s ”optimistic” about the prospects for the super-luxury segment and that his company so far has not been affected by the slowdown. The ultra-premium segment is likely to weather this downturn better than the previous crisis, Mueller-Oetvoes said.

Along with the factory expansion, Rolls-Royce may boost its dealerships to 100 from the current 85 and add a coupe version of its best-selling Ghost model, he said. The carmaker debuted an extended-wheelbase version of the Ghost in Frankfurt.

Lamborghini, owned by Volkswagen AG, unveiled the 189,000- euro Gallardo LP 570-4 Super Trofeo Stradale at the show, the most powerful addition to the Gallardo series. The 570- horsepower vehicle comes with matte black finish on the large rear spoiler, engine hood and front air intakes and surges to 100 kilometers (62 miles) in 3.4 seconds.

Limited Edition

Deliveries of the model, which has a top speed of 320 kilometers per hour, will be confined to 150 and start in December, Chief Executive Officer Stephan Winkelmann said in an interview. The Volkswagen division also announced production of the 1.6 million-euro Sesto Elemento. No more than 20 will be built with deliveries due in early 2013.

Lamborghini sales may advance from last year’s 1,302 on the back of the Aventador LP 700-4, which will hit showrooms in October and is sold out for 18 months, Winkelmann said.

“The super-luxury market has been in steady recovery from its low in 2009,” Winkelmann said in an interview, adding that order books at Lamborghini are showing no declines. “We’re aware that there are risks.”

Bentley Motors Ltd., whose customers include Queen Elizabeth II and the Sultan of Brunei, rolled out an updated version of the Continental GTC convertible with deliveries of the 575-horsepower model starting before the end of the year.

Powered by revamps of the Mulsanne and Continental models announced over the past year, full-year deliveries may top the 7,000 mark which would mark a 40-percent gain on 2010, CEO Wolfgang Duerheimer said in an interview.

An SUV that the Crewe, England-based VW unit is considering may help more than double sales to 15,000 by about 2018, he said.

“We’re very optimistic, our business is developing extremely soundly and the order situation is looking good,” Duerheimer said. “We mustn’t talk up a crisis. Growing debt problems in Europe and the U.S. are giving enough reason for concern, but the underlying economic picture remains positive.”

Sarkozy, Merkel Say Greece’s Future Is in the Euro Region

French President Nicolas Sarkozy and German Chancellor Angela Merkel said they are “convinced” Greece will stay in the euro area as they faced international calls to step up efforts in fighting the region’s debt crisis.

The euro rose after the leaders of Europe’s two biggest economies issued a statement yesterday following a telephone conversation with Greek Prime Minister George Papandreou. It erased most of those gains today. Papandreou committed to meet deficit-reduction targets demanded as a condition for an international bailout, according to statements from governments in Berlin, Athens and Paris.

European governments are aiming to ratify a July 21 agreement to bolster the euro region’s bailout fund and extend a second rescue to Greece. Investor skittishness over the spread of the debt crisis has raised banks’ funding costs and roiled markets worldwide.

“I am skeptical that this will help to reassure markets,” Tullia Bucco, an economist at UniCredit Global Research in Milan, said of the leaders’ statement. “The road to the implementation of the second aid package is still quite long and may prove bumpy.”

The euro was up 0.1 percent to $1.3731 at 8:43 a.m. in Berlin, as futures on the Euro Stoxx 50 Index added 1.2 percent.

Geithner’s Travels

Treasury Secretary Timothy F. Geithner will travel to Wroclaw, Poland, to attend a session for the first time of the European Union’s Economic and Financial Affairs Council that begins tomorrow. Chinese Premier Wen Jiabao yesterday called on other countries to “put their houses in order.”

Underscoring divisions in Europe, European Commission President Jose Barroso said he was close to proposing options on joint euro-area bond sales, putting officials in Brussels on a collision course with Germany over steps to contain the sovereign debt crisis.

“The commission will soon present options for the introduction of euro bonds,” Barroso told the European Parliament yesterday in Strasbourg, France, prompting applause from lawmakers who have backed the idea and a swift rejection from officials in Berlin. “Some of these options could be implemented within the terms of the current treaty; others would require treaty change.”

In the three-way telephone call, Papandreou committed to enacting policies demanded by the EU and International Monetary fund to keep the bailout funds flowing. Sarkozy and Merkel “are convinced that the future of Greece is in the euro zone,” the French statement said.

Greek Steps

The Greek Cabinet this month endorsed measures to help meet deficit targets of 17.1 billion euros ($23.6 billion) in 2011 and 14.9 billion euros in 2012, covering a 2 billion-euro shortfall for this year that has been exacerbated by a deepening recession.

The fulfillment of Greece’s adjustment program is “more than ever” essential and is a condition for the payment of further aid tranches, Merkel said in the call, according to an e-mailed statement from her chief spokesman, Steffen Seibert.

Papandreou said Sept. 10 that the government’s top priority is “to save the country from bankruptcy” and said he would do whatever is necessary to meet targets.

Putting austerity programs into place “is indispensable to establish sustainable and balanced growth in Greece,” according to the statement issued in Paris. “The success of the Greek plan will provide stability to the euro zone.”

Flick warns of “fatal” situation at Latvia’s airBaltic

What feels like the endgame at Latvian airline airBaltic appeared one step closer on September 12 when president and main minority shareholder Bertolt Flick launched a blistering attack on the majority shareholder, the Latvian government.

Flick – who has refused to even visit Latvia since June over fears that he will be arrested as part of a corruption investigation as soon as he lands – claims the government of Prime Minister Valdis Dombrovskis had turned the airline into a "hostage" to elections due to take place on September 17, creating "a crisis of confidence in customers and partners alike" and warned that unless a planned increase in airBaltic's share capital takes place pronto, the situation "may become fatal to the airline."

The German who has been with the company since its founding in 1995 and owns 47%, also took the opportunity to break his recent silence to refute allegations made on an investigative TV show on September 11 that there was anything dodgy about an attempt by a mystery investor the previous week to acquire nearly 60,000 shares in airBaltic for €9.6m.

According to Flick, the attempted purchase was an attempt to tidy up a discrepancy between airBaltic's registered and paid-up share capital which dates as far back as 2002, and that the Transport Ministry had actually asked for the situation to be sorted out before any fresh investment in the company could be made. Attracting an investor willing to pay over the odds for shares was a practical measure to maintain liquidity while the government dithers over making good on a promise to increase the airline's share capital by up to €100m, Flick claimed. "Thus arises the strange situation in which on the one hand the government of Valdis Dombrovskis undertakes to invest LVL50m-70m, but the Finance Minister [Andris Vilks] claims that there is no money, and he obviously does not support the decision," says Flick, who delivered similarly withering broadsides against Transport Minister Uldis Augulis and his long-term hate figure Economy Minister Artis Kampars.

From the other side of the chess board, the appearance of the mystery investor looks suspiciously like a gambit by Flick's Bahamas-registered company Baltic Aviation System (BAS) to increase its holding by acquiring what a spokesman for PM Dombrovskis described as "non-existent" shares. It wouldn't be the first time BAS had done deals of questionable propriety while forgetting to mention them to anyone else, for example selling itself exclusive rights to the "airBaltic" brand in December 2010 for a cool €13m then charging the airline a monthly fee to use its own name.

A Parex in the making

While Flick is right that the fate of airBaltic has become a hot pre-election topic - the state owns 52% of it - it's not as simple as the government wanting to make it so, because the way the whole affair has been handled undermines confidence in the Dombrovskis coalition at least as much as it boosts it.

Opposition MP Nikita Nikiforov, whose Harmony Centre party could emerge as the largest single party after the September 17 vote summed up the pubic mood well on September 8 when he said: "The situation with airBaltic is absolutely absurd."

Comparing the airline's perilous current liquidity (it lost €47m in 2010 according to unaudited accounts signed only by Flick, with rumours abounding that the real losses are bigger) with the notorious Parex Bank, whose near-collapse brought the Latvian state to the edge of bankruptcy, Nikiforov said: "I cannot understand how government officials did not know about this until the last moment – it's a state-owned company!"

While Dombrovskis has shown some willingness to get to the bottom of what is actually happening at airBaltic, the pace of the investigation has been painfully slow and lacked decisiveness. Following a cabinet meeting on September 6 that seemed to back the share capital increase plan, his office back-pedalled rapidly once newswires started to report that a deal had been agreed, talking instead of a "conceptual decision" and "possible government investment if a solution on the deal's structure that is acceptable for the state is reached."

Meanwhile, employees of the airline are left in the least enviable position of all. Workers that bne spoke to said they had been told nothing about their future despite rumours that the airline's 10 Fokker aircraft (of a total fleet of 34 planes) will be imminently retired from service.

While they read slick press releases about August being "the best month in [the airline's] history" and, with a certain irony, an international award for being "one of the top six airlines in the world for innovations in generating ancillary revenue," they are left to wonder which political party is most likely to ensure they still have a job to go to in six months' time.

Cash-strapped in Slovenia

Slovenia's leading lender Nova Ljubljanska Banka (NLB) faces a challenging few months as it looks to raise fresh capital as part of a restructuring plan designed to repair its crisis-ravaged finances.

The bank, which just scraped through the latest financial stress test conducted by the European Central Bank (ECB) in July, is hoping that a shareholder meeting on October 27 will approve a second capital hike of at least €250m demanded by the country's central bank Banka Slovenije. NLB is also looking to issue new bonds potentially worth €1bn to help refinance existing debt and enable it to boost lending. NLB was recently sharply criticised by Development and EU Affairs Minister Mitja Gaspari for failing to support Slovenian corporates with fresh lending.

NLB has already raised €250m in March though a capital increase that boosted its Tier 1 capital ratio to 7.8 % from around 6% - just above the minimum 5% level required by the ECB. That fundraising was almost entirely supported by the Slovenian government, which has a 55% stake in the lender that has been struggling with non-performing loans – running at 16.5% of total lending at end-2010 – which led to a €183.4m loss in 2010.

According to Slovenian economist Joze Damijan Slovenian, taxpayers have already supported NLB to the tune of €1.54bn in net terms in the last two decades, but at its current valuation the bank is worth less than €850m.

For his part, NLB's chief executive, Bozo Jasovic, drafted into the bank in September 2009 to turn around the bank's faltering financial fortunes, has acknowledged that in addition to the global economic slowdown, part of the blame for the 2010 loss lay with the bank's rapid regional expansion in recent years. This led to poor management oversight over the bank's lending practices and a loss of trust by the general public.

In July, Jasovic claimed that the worst may be over for NLB after it reported a small after-tax profit of €1.2m in the first half of the year on the back of lower bad loan charges, which fell roughly 17% to €91m. Although Jasovic forecast in July that NLB would end 2011 in the black, he admitted: "The positive result will be weak and subject to many uncertainties."

The latest predictions from analysts suggest that the bank could actually rack up an €80m loss this year, meaning the bank might need to raise as much as €400m through the capital hike to enable it to meaningfully boost its lending activities.

Friends with benefits

With regard to the forthcoming capital increase, which would boost NLB's Tier 1 capital ratio to 9.5% - 0.5% above the level required by Banka Slovenije – the hope is that the bank's other major shareholder Belgian banking and insurance group KBC, which has a 25% plus one share blocking minority stake, will cough up some much-needed cash. Two development agencies – the European Bank for Reconstruction and Development and the International Finance Corporation — are also understood to have been sounded out about helping NLB.

Whether these potential investors will be willing to participate in the capital hike will largely centre on a question of price. The March increase was transacted at €116 per share and the Slovenian government is reportedly insisting on a similar valuation this time around. However, given NLB's ongoing struggle with NPLs, would-be investors are reported to be demanding guarantees that €116 would also be the minimum price if they decided to exit the bank.

Another possibility for the capital increase is an IPO, although given current turbulent market conditions any potential share offering would likely to have to be completed at a much lower valuation than €116 per share.

Although Banka Slovenije Governor Marko Kranjec has said that he wants the capital increase to be completed by the end of the year, protracted talks over the fundraising may mean it is not carried out until the first quarter of 2012. "The various parties involved in the capital increase discussions make the process more complicated," says Lindsey Liddell, a director at Fitch Ratings in London.

NLB is also said to be mulling a €300m-€400m unsecured bond and a pioneering covered bond issue backed by public sector loans of up to €600m, which would be the first ever such bond issued in Slovenia. Proceeds from the two transactions would help NLB to repay an outstanding €1.5bn issue which matures in 2012. The bank has also been active in the international syndicated loan market, securing a €350m two-year credit from a syndicate of 16 banks. "The recent syndicated loan showed that NLB still has relationship banking ties it can call on," says Liddell.

Meanwhile, after its latest meeting with NLB, Slovenia's Capital Assets Management Agency (AUKN), which manages the government's corporate shareholdings, has outlined the future steps it wants the bank to take. These include a comprehensive audit of NLB's operations in recent years to identify and prosecute those individuals responsible for questionable lending decisions and to introduce measures to help to prevent any reoccurrence. AUKN also stated that it wants NLB to accelerate and strengthen cost-cutting measures, which it claims have been too slow and too weak so far, in a bid to improve the bank's return on equity to 10% by 2013.