Should Slovenia fail to stabilise its economy in the upcoming weeks it will probably be forced to ask for a bailout from the European Union, the Governor of the Bank of Slovenia and Slovenian representative in the European Central Bank Bostjan Jazbec revealed in an interview for the Slovenian newspaper Delo.
Once the economic champion among the former socialist countries that joined the European Union in 2004, the former Yugoslav republic has gone through a series of financial troubles since Europe plunged into a full-scale recession in 2008. The crisis has revealed all the faults within the Slovenian economic model, which is based on high levels of state ownership across all sectors of the economy. This unhealthy relationship between politics and the economy were particularly damaging for Slovenia’s heavily debt-burdened banking sector, which is in the centre of government efforts to avoid becoming the fifth European country forced to accept financial help.
Slovenia established a ‘bad bank’ (DUTB) in May to transfer around €7 billion of non-performing loans (NPL) from its 18 banks as a part of its effort to reform the failing banking sector. This would reduce the level of NPLs in the economy from around 25% to 8%. The process started on September 6 with the announcement of a controlled liquidation of two smaller privately owned banks, Probanka and Factor Banka. But the real challenge for the government will be the restructuring and partial privatisation of the three largest state-owned banks. The big threes, Nova Ljubljanska Banka, Nova Kreditna Banka Maribor and Abanka, have not only a combined market share of 50%, but also the largest share of NPL’s at around €3.3 billion.
However, the European Commission has put the whole process on hold until the independent asset quality review and stress test are finished, expected by the end of September. The bad news for the government is that the review is likely to reveal a greater level of bad loans than previously expected.
At the moment, the successful $3.5 billion bond issue in May gave the government enough cash to fund the estimated €1.5 billion recapitalization costs, but the bank salvage operation will inevitably have dramatic consequences for the Slovenian budget deficit, which is expected to swell to 8% this year. The Slovenian sovereign debt has already doubled from 22% in 2007 to 52% of GDP in 2012, and it is expected to rise to 77% in 2016, according to Ernst & Young’s June Eurozone Forecast.
Moreover, the yield on Slovenian 10-year benchmark bond maturing in 2022 has been hovering above 6.50% since early August and is dangerously close to 7%, which is generally perceived as unsustainable. This might prove crucial for Slovenia’s efforts to secure an additional €1.3 billion in order to repay the Eurobond package maturing in April 2014.
The key to a successful resolution of the Slovenian banking crisis lies not only in the complexity of technical aspects of the restructuring of the banking sector, but primarily in the realisation that Slovenia needs to tackle large-scale structural reforms. This includes implementing the much delayed privatisation process and forcing unavoidable austerity measures that might prove a bridge too far for the ruling centre-left ‘coalition of responsibility’ headed by the Prime Minister Alenka Bratusek.
Both Brussels and Frankfurt are concerned that Slovenia will not manage to overcome its financial troubles on its own. Although Eurozone’s financial ministers gave Slovenian reform plans the green light at their recent informal meeting in Vilnius, it seems that the European Central Bank is already making plans to ring-fence the impact of a potential bailout on the wider Eurozone financial system. According to the German business daily Handelsblatt, the ECB is interested in Slovenia applying for aid from the European Stability Mechanism before the Slovenian borrowing costs become unsustainable. The newly resuscitated Eurozone economies cannot afford to take that chance.
