Next Domino? Slovenia Totters Toward Euro-Crisis Brink

Photo Gallery: A Financial Headache in Ljubljana Photos
AFP

Could Slovenia become the next euro-crisis victim? A new OECD report highlights the deep problems facing the Slovenian banking industry and economy. While both Brussels and Ljubljana insist that a bailout won't be necessary, difficult times are in store for the country.

The row of buildings, containing 833 apartments, stands mostly empty, and construction on some of the buildings has not quite been completed. Nearby is a deep hole, ready to be filed with a brand-new hotel that will now almost surely never be built.

It is a scene that can be found in a number of euro-zone countries, ravaged by a sovereign debt crisis and a burst real estate bubble. But this particular complex, known as Siska, is on the outskirts of Ljubljana, the capital of tiny Slovenia. And it provides a dramatic backdrop to growing fears that the country could soon become the next euro-zone member state to require a bailout from Brussels.

Concerns that Ljubljana might soon request emergency aid were intensified on Tuesday by a report issued by the Organization for Economic Cooperation and Development (OECD). Noting the country's economic struggles, rising sovereign debt and deeply troubled banking industry, the report noted that the country is at risk of a "prolonged downturn and constrained access to financial markets."

In other words, Slovenia might soon be unable to borrow the money from the markets it needs to remain solvent.

Slovenian Prime Minister Alenka Bratusek was quick to dismiss bailout concerns as "speculation." She insisted that her country's economic fundamentals remained sound and that it could take care of the current problems it is facing without external help. European Commission President Jose Manuel Barroso likewise brushed off the OECD report, saying he was "confident that Slovenia will rise to the challenge" facing it.

Huge Banking Sector Problems

Those challenges are many. The Slovenian economy is in recession, with the OECD expecting a further contraction of 2.1 percent this year. Sovereign debt, though currently lower than the euro-zone average, is on pace to double to 100 percent of gross domestic product by 2025, according to the report. While the OECD notes that Ljubljana has taken significant steps toward consolidating its budget and reforming its economy, it writes that it could be many years before Slovenia resumes catching up with "more developed OECD countries."

First and foremost, however, Slovenia's problems are focused on its financial institutions. While the banking sector is worth the equivalent of about 140 percent of the country's GDP -- well below the euro-zone average and much lower than the more than 800 percent ratio seen in Cyprus -- the real estate collapse in the country has left banks there with significant quantities of bad loans on their books.

As the OECD report highlighted, many of the problems faced by the banks can be traced to the fact that the industry was never fully privatized after the fall of communism. The result has been an unhealthy amount of political influence on large banks such as Nova Ljubljanska Banka, the country's largest. Critics allege that some companies even received special treatment due to their political ties.

'Working Day and Night'

The result has been up to €7 billion ($9.17 billion) in bad loans weighing on the balance sheets of Slovenian banks. Bratusek's government is currently pursuing a plan to create a "bad bank" to offload those loans, many of them to the moribund construction industry. According to news reports, it will also have to inject €1 billion into those banks so as to prepare them for sale, though no date has been set. Concerns that the government may not be able to generate that cash along with another €2 billion Ljubljana needs to remain solvent have been driving up the country's borrowing costs.

"We are aware that the banking sector is the No. 1 problem in Slovenia," said Bratusek, who became prime minister in March. "We are working on it literally day and night."

Were Slovenia forced to apply for emergency aid, it would become the sixth euro-zone country to do so. Its economy represents just 0.4 percent of the currency union's annual economic output.

cgh -- with wire reports

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