After Cyprus, Is Slovenia Next Euro Zone Domino? (Apr 2013)

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Source: Reuters – After Cyprus, is Slovenia next euro zone domino?

Successive Slovenian governments have refused to privatize the country’s banks, which made disastrous loans to politically connected business interests and now threaten to drag the country center stage in the euro zone debt crisis.

A span of unfinished apartment blocks in the Siska complex on the outskirts of Ljubljana is emblematic of the former Yugoslav republic’s woes, just as many such ghost neighborhoods in Europe’s debt-choked south stand testament to the depth of the broader continent’s economic problems.

The rows of buildings, housing 833 flats in all, stand mostly empty, casualties of a property boom turned bust and a subsequent recession. Alongside, Vegrad, a company once led by a well-placed politician, also planned to build a hotel, but got no further than digging an enormous hole. An apt symbol, as Slovenia comes under growing pressure to seek a bailout to fill a financial hole, just as Cyprus did last month.

The countries are different in many ways, but they have at least two things in common: like Cyprus, Slovenia needs to recapitalize its biggest banks, and it does not have the money to do so.

Slovenia was the only former communist state to refuse to sell most of its state-owned banking system after the fall of communism, so now it is taxpayers alone who must foot the bill of healing lenders after years of political influence and bad management loaded them down with bad loans equal to about a fifth of the economy.

Joze Damijan, an economics professor who was development minister in 2006, said state ownership meant a number of people and firms got special treatment from the lenders because of ties between political parties and the banks’ management.

In the case of the Siska project, Vegrad borrowed from Slovenian banks – it owes 107.8 million euros to the largest lender Nova Ljubljanska Banka – then defaulted.

Slovenia and Cyprus both joined the EU when the bloc launched its “big bang” expansion, opening the door to 10 mostly ex communist countries in 2004, which then swapped their currencies for euros a few years later.

But while banks in Cyprus suffered heavy losses due to large Greek bond holdings, Slovenia has virtually none.

And Cyprus faced criticism for hosting an offshore banking sector that was eight times the size of its economy by luring depositors, especially from Russia and Britain, who sought to avoid high taxes at home. Slovenia’s bank sector is just 1.4 times as big as its economy, less than half the euro zone average.

But the source of the two countries’ problems are similar. One was the cheap funding that poured into Slovenia, Cyprus, Spain, Ireland and other euro zone periphery states that helped inflate real estate bubbles.

In Slovenia’s case, this was exacerbated by a lack of adequate oversight in the state-owned financial system.”

There was excess liquidity which blurred the judgment of some,” said newly appointed central bank governor Bostjan Jazbec who will take over in July. ”

It is clear that in Slovenia we were not very successful in the management of the state companies.”

The two countries also share the same vulnerability through their banks. According to the IMF, Slovenia will need to recapitalize its three largest, which are majority or largely state owned, by a total of 1 billion euros this year, or about 3 percent of GDP.

Last year non-performing loans reached 14.4 percent of the banks’ loan books.

And while Slovenia still has access to international markets, investors have pushed its borrowing costs to above 6 percent, not far from the 7 percent considered unsustainable for a country to fund itself.

The government must also inject up to 1 billion euros in new cash into the banks to lift their value and then sell them, although no date has been mentioned.

That cash must come from an overall 3 billion euros the government must borrow, a goal complicated by the crisis in Cyprus.

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