Eurozone Fears For Slovenia As Bad Debt Brings Economy To A Standstill (May 2013)

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Source: The Guardian – Eurozone fears for Slovenia as bad debt brings economy to a standstill

Notable excerpts:

Slovenia needs at least €900m ($1.15bn) by July to refloat one of its struggling banks. This is a large sum of money for a country with a GDP of only €35bn.

The question is where to find the funds. The public deficit is deepening and investors are beginning to question the country’s solvency, to such an extent that it can no longer borrow on the money markets. On 30 April Moody’s, the credit-rating agency, downgraded Slovenian bonds to junk status. Both Brussels and the OECD are urging the government to take action.

But why is there such a hurry? The economy may be sluggish, but Slovenia, once a part of Yugoslavia, still feels like a Balkan version of Switzerland, with plush mountain pastures and tidy streets. With the unemployment rate at about 10% and public borrowing equivalent to just over half of GDP – far less than France – many Slovenians cannot understand what the fuss is about. But Slovenia looks likely to be the next eurozone hotspot, though at first sight the situation seems very different. Here the banking sector’s assets only add up to 130% of GDP, compared with 750% in Cyprus.

The root of the problem lies in what happened when Slovenia achieved independence in 1991.

While neighbouring eastern-bloc countries rushed towards the free market, Slovenia took a more cautious approach. Privatisation was limited and in many cases the buyers – senior management – were closely allied to the government. The money needed to buy businesses came from state-owned banks.

“Slovenians thought capitalism was the shops full of goods they saw in Trento [across the border in Italy]. They wanted that but without giving up the protection of the state,” says Bozidar Jezernik, professor of ethnology at Ljubljana University. “Depending less on the collective organisation, more on oneself, is not a popular idea here.”

The “alternative capitalist” model fared quite well till 2008, when the badly managed publicly owned companies started to fail and bad debt rose. It emerged that banks had granted loans to those with good connections not business expertise. “A classic case of crony capitalism,” says Igor Masten, an economist at Ljubljana University.

The banks’ solution was to stop lending, even to companies in good health. “There’s no point in applying for a loan. It’s been like that for the past three years,” says entrepreneur Mitja Zagar.

So as industry stumbled, the country tipped into recession. “Today Slovenia is clinically dead,” asserts Primoz Cirman, a journalist on the Dnevnik daily.

Suddenly the former conservative prime minister, Janez Jansa, introduced radical austerity measures, which included disbanding the arts ministry.

A corruption scandal, which prompted the resignation of both Jansa and the leftwing mayor of Ljubljana, deepened the sense of disgust. Slovenians realised that a tiny elite had taken control of their country.

Some would be happy to see the troika clear up the mess. But the majority fear what journalist Bostjan Videmsek calls “catastroika”, with drastic austerity and across-the-board privatisation, in short the end of the Slovenian model.

Bratusek, a political novice, is supposed to prevent this. But as the electorate are beginning to understand, she appears to be doing exactly the same as her predecessors: setting up a bad bank to centralise bad debt, privatising at least one of the three big banks and slashing state spending.

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