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.