25 April 2013

Ian Wishart: Is Slovenia en route to a banking sector bail-out?

Problems for the new government of the eurozone's fourth smallest economy are mounting. The messy Cyprus solution showed what happens when warnings about the need for reform go unheeded. Just as in Cyprus, Slovenia's problems stem from a fragile banking sector. Alenka Bratušek, the country's prime minister, said that recapitalisation was her centre-left government's “number one priority”. Ministers are planning to sell state assets and use revenues estimated at about €1 billion to plough into the country's three biggest banks. A ‘bad bank' is set to be created to take the banks' bad assets off their books.

Slovenia's problems could become insurmountable if that €1 billion is found to be insufficient. In a report published earlier this month, the Organisation for Economic Co-operation and Development (OECD) warned this could indeed be the case. Some analysts insist the requirement could even run to two or three times that amount. The OECD placed the blame firmly with the banks, saying that they had indulged in “excessive risk-taking”, were badly run and had been subject to “insufficiently effective supervision”.

This would be bad enough, but the government is wrestling with deeper economic problems. The budget deficit is widening, from 4.4 per cent last year to an estimated 5.1 per cent this year. When Slovenia shook off its communist shackles, it omitted to privatise its banks and much of its industry. Allegations of political interference are never far away. It has also failed to attract foreign investment in the way that other former Eastern bloc countries have done, relying on exports instead. In the good times this did not matter, and Slovenia was held up as a poster child for post-communist development. But when the global financial crisis hit, Slovenia's problems were laid bare just as export demand fell away.

Now, the country has been hit by a double-dip recession, exacerbated by the bursting of a large property bubble. This is where the banks become culpable. They granted too many loans to people and companies who struggled to pay them back. At current official estimates, €7 billion of these ‘bad loans' are dragging the sector down.

So it is hardly surprising that the OECD talks about “additional and far-reaching reforms... needed as soon as possible” and that the European Commission, in its winter economic forecasts published on 22 February, says that for a (still sluggish) recovery to be even sighted next year there needed to be a “swift resolution of the banking crisis”.

Full article (EV subscription required)

© European Voice