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

ASEAN Ministers to Push for S. China Sea Agreements

According to documents obtained by VOA Khmer, ministers will stand up for 'freedom of navigation, unimpeded lawful maritime commerce, trade and over flight' More

Puerto Rico Defaults on $58M Debt Payment

Payment was due Saturday, default is first in country's 117 years as a United States possession More

Turkish Public Fears Jihadists More Than Kurds

Turkey facing twin threats of terrorism by Islamic State and PKK Kurdish separatists, says President Erdogan’s ruling AK Party More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Iraqi Yazidis Fear Death of Their Communityi
X
Sharon Behn
August 03, 2015 2:23 PM
A year ago on August 3, Islamic State militants stormed the homelands of Iraq’s Yazidi minority, killing hundreds of men and enslaving thousands of women. The scenes of desperate Yazidi families crowding on the top of Sinjar mountain without food or water spurred Kurdish fighters into action, an emergency airlift and the start of the U.S. airstrike campaign against the Islamic State Sunni extremists. VOA's Sharon Benh reports from northern Iraq.
Video

Video Iraqi Yazidis Fear Death of Their Community

A year ago on August 3, Islamic State militants stormed the homelands of Iraq’s Yazidi minority, killing hundreds of men and enslaving thousands of women. The scenes of desperate Yazidi families crowding on the top of Sinjar mountain without food or water spurred Kurdish fighters into action, an emergency airlift and the start of the U.S. airstrike campaign against the Islamic State Sunni extremists. VOA's Sharon Benh reports from northern Iraq.
Video

Video Bangkok Warned It Soon Could Be Submerged

Italy's Venice and America's New Orleans are not the only cities gradually submerging. The nearly ten million residents of the Bangkok urban area now must confront warnings the city could become uninhabitable in a few decades. VOA Correspondent Steve Herman reports from the Thai capital.
Video

Video Inclusive Gym Gets People With Disabilities in Fitness Spirit

Individuals with special needs are 58 percent more likely to be obese than the general population. According to the U.S. Centers for Disease Control, they also have an increased likelihood of anxiety, depression and social isolation. But a sports club outside Washington wants to make a difference in these people's lives. With Carol Pearson narrating, VOA's June Soh reports.
Video

Video Astronauts Train Underwater for Deep Space Missions

Manned deep space missions are still a long way off, but space agencies are already testing procedures, equipment and human stamina for operations in extreme environment conditions. Small groups of astronauts take turns in spending days in an underwater lab, off Florida’s southern coast, simulating future missions to some remote world. VOA’s George Putic reports.
Video

Video Special Olympics Show Competitors' Skill, Determination

Special Olympics competitions will wrap up Saturday in Los Angeles, and the closing ceremony for athletes with intellectual disabilities will be held Sunday night. In a week of competition, athletes have shown what they can do through skill and determination. VOA's Mike O'Sullivan reports.
Video

Video Civil Rights Leaders Struggled to Achieve Voting Rights Act

Fifty years ago, lawmakers approved, and U.S. President Lyndon Johnson signed, the Voting Rights Act of 1965. The measure outlawed racial discrimination in voting, giving millions of blacks in many parts of the southern United States federal enforcement of the right to vote. Correspondent Chris Simkins introduces us to some civil rights leaders who were on the front lines in the struggle for voting rights.
Video

Video Shooter’s Grill: Serving Food with a Touch of the Second Amendment

Shooter's Grill, a restaurant in Rifle, Colorado, attracts visitors from all over the world as well as local patrons. The reason? Waitresses openly carry loaded firearms as they serve food, and customers are welcome to carry them, too. VOA's Enming Liu and Lin Yang paid a visit to Shooter's Grill, and heard different opinions about this unique establishment.
Video

Video Despite Controversy, Business Owner Continues Sale of Confederate Flags

At Cooter’s, a store in rural Sperryville, Virginia, about 120 kilometers west of Washington, D.C., Confederate flags are flying off the shelves. The red, white and blue battle flag, with 13 white stars representing the Confederate states, was carried by southern forces during the U.S. Civil War in the 1860s. The South had seceded from the Union over several key issues of disagreement, including slavery. VOA’s Deborah Block has the story.
Video

Video Booming London Property a ‘Haven for Dirty Money’

Billions of dollars of so-called ‘dirty money’ from the proceeds of crime - especially from Russia - are being laundered through the London property market, according to anti-corruption activists. As Henry Ridgwell reports from the British capital, the government has pledged to crack down on the practice.
Video

Video Hometown of Boy Scouts of America Founder Reacts to Gay Leader Decision

Ottawa, Illinois, is the hometown of W.D. Boyce, who founded the Boy Scouts of America in 1910. In Ottawa, where Scouting remains an important part of the legacy of the community, the end of the organization's ban on openly gay adult leaders was seen as inevitable. VOA's Kane Farabaugh reports.

VOA Blogs

World Currencies

EUR
USD
0.9118
JPY
USD
124.31
GBP
USD
0.6420
CAD
USD
1.3048
INR
USD
64.136

Rates may not be current.