Milestone: Slovenia: Next In Line For A Bailout?



By Valentina Pasquali

With all eyes on the much larger Spain and Italy, Slovenia might actually turn out to be the next eurozone country in line for a bailout.

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Bets are on as to whether Slovenia will require a bailout

The economy of this small alpine nation has contracted in two of the last three quarters, and losses are projected to continue through 2013. Such poor performance has exacerbated a banking crisis that has been building for years.

“Excessive lending in the pre-crisis year, particularly to the real-estate sector, has left banks with high-and-rising nonperforming loans,” says William Jackson, emerging markets economist at advisory firm Capital Economics. “Banks could require recapitalization of around €5 billion ($6.5 billion), or 15% of GDP, and given that bond yields are above 6%, there is a real question about whether the government could finance it.”

During the global financial crisis, Slovenia lost two of its biggest sources of growth: borrowing from abroad and exports to the rest of the eurozone. “Now both of these major impetuses are gone,” says Andrew Birch, an economist at IHS Global Insight. “The international credit is just not there, and trade partners, Italy being a big one, aren’t buying.”

The government is now trying to pass austerity measures to avoid a bailout. However, they have not yet addressed the core issue. “They will need to go back to the banking sector and recapitalize it somehow, and the best way to do that is [by launching] a big push for privatization,” says Birch.

Capital Economics believes that Slovenia’s economic future does not rest entirely with policymakers in Ljubljana. “If there is a renewed flare-up in tensions in the eurozone, bonds may come under pressure again, and the government may be barred from borrowing on the markets,” says Jackson. “Under these circumstances, I think Slovenia would probably require a bailout.”

For Birch, it might not come to that. “But as far as odds,” he says, “I’d put it at a fairly high percentage, maybe around 35% to 40%, that there will be one.”