Spotlight on Slovenia

Back in the spring, we looked at who might be next in the line of eurozone bailout requests. It's now looking increasingly likely that one of our predictions, Portugal, will require some form of further assistance to fully exit its current bailout. Now, suspicions are rising that our other tip, Slovenia, may need external aid in a not-too-distant future.

Today and yesterday, eurozone finance ministers have been meeting in Lithuania with aid for Slovenia (as well as Greece, Portugal and Ireland) top of the eurozone’s agenda.

Recap – What problems is Slovenia facing?

• The banking sector is nursing a possible €7.5bn (21% of GDP) capital shortfall. Although Slovenia’s government debt remains very manageable (at 54% of GDP) it could increase quickly due to a toxic combination of collapsing economic growth and spiralling costs of bailing out banks.

• As we noted back in the spring, provisions against this capital shortfall are far below the levels needed and covered at best half of the problematic loans. Since then, the level of bad loans has increased, while little progress has been made on recapitalising banks. The recent bailout of two small banks cost a combined €900m+, and included a bail-in of subordinated debtors. This could set the tone for the approach to the rest of the sector. Worryingly, this is also around the total amount previously estimated for the capital needs of the whole banking sector.

• The European Commission has pushed the independent bank stress test to be expanded to cover the whole banking sector. The results are expected at the start of next month, and could well reveal deeper holes in Slovenia banks. Filling these without external aid will be tricky.

• Non-financial corporations also continue to struggle under a mountain of debt, with a debt-to-equity ratio of around 200%. This will be a significant drag on the economy for some time as firms shrink and deleverage while many could well shutter for good. This of course has further knock on impacts for the level of bad loans at the banks and the level of unemployment.

• Austerity has been limited so far with the government deficit at around 8% of GDP (and possibly set to increase this year). Significant cuts will still have to happen and, as we have been at pains to point out before, the combination of bank deleveraging, fiscal consolidation and struggling domestic demand can create a very painful downward spiral.

• The privatisation programme has failed to get off the ground, with the only sizeable move so far being the €240m sale of retailer Mercator.

• Concerns also remain surrounding the significant amount of cronyism and corruption at play, particularly within state owned firms and within the financial sector. The government has recently moved to crack down on the shadow economy with wider taxes, although whether this will prove successful remains to be seen.

Despite these issues, German Finance Minister Wolfgang Schaüble struck a positive tone today, saying,

“I think if they stay strictly on course -- and they’ve said that want to do that; they’ve supplied two small banks with capital over the weekend -- then they’ll manage without it…So as long as Slovenia itself says they can manage it, we should encourage them in that.”

EU Economic and Monetary Affairs Commissioner Olli Rehn voiced similar sentiments. So far then, Slovenia seems to be happy to go it alone and (possibly with other things on their minds) Germany and others are happy to acquiesce. But with the ECB reportedly increasingly concerned about the state of the banking sector, the upcoming stress test results could be a turning point – assuming of course they are judged credible (far from a given). 

If any aid is eventually forthcoming, as we’ve argued before, it seems much more likely to take a similar form to that in Spain than in Cyprus or elsewhere.