News / Economy

Is Slovenia Next Eurozone Domino?

Ljubljanska banka building seen through tree branches, Ljubljana, Slovenia, March 28, 2013.
Ljubljanska banka building seen through tree branches, Ljubljana, Slovenia, March 28, 2013.
Reuters
— 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 eurozone 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.
 
Vegrad's CEO was Hilda Tovsak, a former top official in the conservative Christian Democrats, who Damijan said benefited from her connections.
 
"The power of the director of Vegrad was very big," he told Reuters. "She had connections everywhere."
 
A court sentenced her to 14 months in prison last month for arranging bids with two other construction firms for an airport control tower in 2008. She is also being tried for using money from a Vegrad-linked mutual fund in 2009 and 2010.
 
Tovsak has denied wrongdoing in both cases, and no evidence has been produced that Tovsak or Vegrad acted unlawfully in connection with the Siska loans. Her lawyer said she was not available to comment for this article.
 
Damijan left the government after only three months when he found that a plan to sell NLB was being undermined by political pressure to keep it in state hands where politicians could continue to exert control.
 
"I resigned because it became clear that there will be no privatization of NLB, that the state was determined to even increase control over it," he told Reuters. "It was already clear then that the state was a bad owner."
 
Media have reported that other bad loans are stacking up for the bank: 187 million euros owed by builder SCT, 100 million by construction firm Primorje, and 115 million by investment firm Zvon 1 Holding. All three firms are now bankrupt.
 
NLB disputes those figures but has given no other details, saying it cannot reveal client information.
 
Bailout?

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 eurozone average.
 
But the source of the two countries' problems is similar.
 
One was the cheap funding that poured into Slovenia, Cyprus, Spain, Ireland and other eurozone 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 one billion euros this year, or about three percent of GDP.
 
Last year non-performing loans reached 14.4 percent of the banks' loan books.
 
Repeated protestations by Ljubljana officials that "Slovenia is not Cyprus" echo other countries' efforts to calm markets before they too were forced into bailouts.
 
And while Slovenia still has access to international markets, investors have pushed its borrowing costs to above six percent, not far from the seven percent considered unsustainable for a country to fund itself.
 
An opinion poll by Delo Stik in March showed 48 percent of Slovenians believed the country would not survive without international help, versus just 44 percent who thought it could.
 
"They say Slovenia is not like Cyprus, but I'm afraid things may get just as bad," said a woman named Nada, 63, who works part-time in a garden center. "They just told me this week that there is no work for me for at least two months. Who cares about flowers at a time like this?"
 
Mixed signals

Prime Minister Alenka Bratusek, who took power after a wave of protests against graft and austerity helped topple the previous government, is pushing ahead with a plan to create a "bad bank" to quarantine seven billion euros in non-performing loans, most of which are burdening three main lenders, NLB, Nova KBM and Abanka Vipa.
 
The government must also inject up to one 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 three billion euros the government must borrow, a goal complicated by the crisis in Cyprus.
 
Conflicting statements from the top don't help, either.
 
Former Prime Minister Janez Jansa, ousted earlier this year, has said Ljubljana must issue a bond by June 6 or it would not be able to pay back a 907 million euro treasury bill coming due.
 
Last week, however, new Finance Minister Uros Cufer said the country could hold on until autumn to wait until markets calmed.
 
Cufer also said Slovenia could sell a major state asset this year. He gave no details, but the government has big stakes in the country's biggest telecommunications, fuels and insurance companies worth about 780 million euros at the moment.
 
Analysts are not sure who to believe. Although Slovenia sold enough debt at the end of 2012 to create a cash buffer that could last until about September, they said delaying a new debt issue until the last minute would be unwise.
 
"Post Cyprus, I think managing market and depositor sentiment is key ... Waiting for September or October is probably not a good thing," said Standard Bank head of research Tim Ash.
 
"They need to remain ahead of the market by really showing they have reform plans in place and can address the issues without resort to a Troika bail-out. Even then, it might not be possible."

You May Like

At Khmer Rouge Court, Long-Awaited Verdict Approaches

First phase of trial, which is coming to an end, has focused on forced exodus of Phnom Penh in 1975 - and now many are hopeful justice will be served More

Video When Fighting Eases, Gazans Line Up at Bakeries

When there is a lull in the conflict, residents who have been hunkered down in their apartments rush out to stock up on food and other necessities More

Video Information War Rages Alongside Real One in Ukraine

Downing of Malaysian airliner, allegations of cross-border shelling move information war in war-torn country to a new level More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Information War Rages Alongside Real One in Ukrainei
X
Al Pessin
July 31, 2014 8:13 PM
The downing of the Malaysian airliner two weeks ago, and allegations that Russians are shelling Ukrainian troops across the border, have moved the information war swirling around the Ukrainian conflict to a new level. VOA's Al Pessin reports from Kyiv.
Video

Video Information War Rages Alongside Real One in Ukraine

The downing of the Malaysian airliner two weeks ago, and allegations that Russians are shelling Ukrainian troops across the border, have moved the information war swirling around the Ukrainian conflict to a new level. VOA's Al Pessin reports from Kyiv.
Video

Video When Fighting Eases, Gazans Line Up at Bakeries

When there is a lull in the conflict in Gaza, residents who have been hunkered down in their apartments rush out to stock up on food and other necessities. Probably the most important destination is the local bakery. VOA’s Scott Bobb reports from Gaza City.
Video

Video US-Funded Program Offers Honduran Children Alternative to Illegal Immigration

President Obama and Central American leaders recently agreed to come up with a plan to address poverty and crime in the region that is fueling the surge of young migrants trying to illegally enter the United States. VOA’s Brian Padden looks at one such program in Honduras - funded in part by the United States - which gives street kids not only food and safety but a chance for a better life without, crossing the border.
Video

Video 'Fab Lab' Igniting Revolution in Kenya

The University of Nairobi’s Science and Technology Park is banking on 3-D prototyping to spark a manufacturing revolution in the country. Lenny Ruvaga has more for from Nairobi's so-called “FabLab” for VOA.
Video

Video Gazans in Shelled School Sought Shelter

Israel's air and ground assault against Hamas-led fighters in Gaza has forced many Palestinians to flee their homes, seeking safety. But safe places are hard to find, as VOA’s Scott Bobb reports from Jabaliya.
Video

Video Rapid Spread of Ebola in West Africa Prompts Global Alert

Across West Africa, health officials are struggling to keep up with what the World Health Organization describes as the worst ebola outbreak on record. The virus has killed hundreds of people this year. U.S. President Barack Obama and other world leaders are watching the developments closely as they weigh what actions, if any, are needed to help contain the disease.
Video

Video Michelle Obama: Young Africans Need to Embrace Women's Rights

U.S. first lady Michelle Obama urged some of Africa's best and brightest to advocate for women's rights in their home countries. As VOA's Pam Dockins explains, Obama spoke to some 500 participants of the Young African Leaders Initiative, a six-week U.S.-based training and development program.
Video

Video Immigrant Influx on Texas Border Heats Up Political Debate

Immigrants from Central America continue to cross the U.S.-Mexico border in south Texas, seeking asylum in the United States, as officials grapple with ways to deal with the problem and provide shelter for thousands of minors among the illegal border crossers. As VOA's Greg Flakus reports from Houston, the issue is complicated by internal U.S. politics and U.S. relations with the troubled nations that immigrants are fleeing.
Video

Video Study: Latino Students Most Segregated in California

Even though legal school segregation ended in the United States 60 years ago, one study finds segregation still occurs in the U.S. based on income and race. The University of California Los Angeles Civil Rights Project finds that students in California are more segregated by race than ever before, especially Latinos. Elizabeth Lee reports for VOA from Los Angeles.

AppleAndroid

World Currencies

EUR
USD
0.7305
JPY
USD
101.53
GBP
USD
0.5830
CAD
USD
1.0656
INR
USD
60.075

Rates may not be current.