Bailout Nr. 5? Euro Zone Eyes Slovenia's Troubled Banks

NLB is the largest bank in Slovenia, and has been downgraded by ratings agencies to junk status. Zoom
REUTERS

NLB is the largest bank in Slovenia, and has been downgraded by ratings agencies to junk status.

The euro crisis has been on the back burner lately, but the problems facing banks in Slovenia are coming to a head. Billions of euros in bad loans make the country a candidate for the next bailout.

Euro zone finance ministers are reportedly considering whether Slovenia may need outside aid to shore up its banking system. The German business daily Handelsblatt reports on Thursday that the Eurogroup is due to discuss the country at its next meeting on Friday.

Slovenian Finance Minister Uros Cufer is expected to report to his euro-zone counterparts on the country's financial situation, which has been deteriorating over the past several months. The country is in recession, and is still struggling to bring its budget deficit in line with the EU-mandated maximum of 3 percent of gross domestic product.

Slovenia was the first former Yugoslav republic to join NATO and the EU, and was once hailed as a model for other former socialist European democracies seeking to establish competitive economies. But its rising standard of living appears to have been built in part on bad credit.

The Slovenian government last week announced it would liquidate two small private banks, Factor Banka and Probanka, and would put up €1.3 billion to guarantee the banks' liabilities. The central bank governor said the measures were to help avoid a run on the country's other banks.

'Emergency Liquidity'

The two financial institutions account for only 4.4 percent of the country's total bank assets. But observers believe the problem could be much more widespread, with bad loans in the entire Slovenian banking sector totaling more than €7 billion.

Handelsblatt also cited unnamed sources in the euro zone as saying the European Central Bank would likely have to grant Slovenian banks "emergency liquidity assistance" (ELA) -- something Cypriot banks received in great quantities in the run-up to that country's sovereign bailout announced in March.

The government in Ljubljana desperately wants to avoid becoming the fifth euro-zone country to accept an international bailout of state finances. The four countries that have already done so -- Greece, Ireland, Portugal and Cyprus -- have been forced to push through draconian budget cuts and tax hikes that have faced fierce resistance from voters. Spain also received emergency loans from the EU for its banking system, but avoided a full government bailout.

acb -- with wires

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1. optional
danm 09/12/2013
I worry that Slovenia and The Netherlands may just be the tip of the iceberg when it comes to a European real estate bubble. Real estate values relative to household incomes are very, very high. If a correction occurs then it will leave tens of billions of euros worth of mortgages undercollateralized. This is a real point of vulnerability for the European economy that does not seem to get a lot of attention.
2. optional
peskyvera 09/12/2013
Another loser???
3. optional
danm 09/12/2013
The struggling banks are a symptom. The underlying problem is the overvaluation of certain segments of the European real estate market. If your analysis starts at this point then it will be easier to determine what other countries are at risk and just how large this problem could become. Obviously the Solvenian construction sector overbuilt homes and this artificially drove up prices in a way similar to what happened in the USA. What other markets might have a similar problem?
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