SLOVENIA IN TROUBLE: THERE'S NO TIME TO WASTE

Slovenia’s banking problem is not overleveraging, but failing state banks. Unlike all other new eastern EU members, Slovenia never privatized its big banks. Four state banks have a market share of 80 percent. Now the three biggest of these banks (Novaja Ljubljanska Banka d.d., Nova Kreditna Banka Maribor d.d., and Abanka Vipa d.d.) are in trouble, each one having suffered large losses in the last three years. The Organization of Economic Cooperation and Development (OECD) assesses their bad loans at €7 billion.

In the case of Slovenia the share of banking assets held by domestic (as opposed to foreign) banks is as large as 72 percent.

The OECD (2013) has just published an economic survey for Slovenia. Its key recommendations for the banking sector are:

  • Recapitalize distressed but viable banks…and wind down non-viable banks. To reduce the fiscal costs of bank resolutions, holders of subordinated debt and lower-ranked hybrid capital instruments should absorb losses.
  • Privatize state-owned banks and do not retain a blocking minority shareholding.

Nova Kreditna Banka Maribor d.d. should be closed. It is owned 79 percent by the state and the second biggest in the country. The largest bank, Novaja Ljubljanska Banka d.d., is much more difficult to handle. Its total assets in Slovenia are one-third of all Slovenian banking assets and 27 percent of GDP, but it also has large shares of the banking assets in four other former Yugoslav republics, namely Bosnia, Kosovo, Macedonia, and Montenegro, all poor and fragile new nations.

The IMF is currently suggesting a bank recapitalization of €3 billion, which corresponds to 8 percent of expected 2013 GDP. The government should close down or sell the four big state-dominated banks to the private sector as soon as is reasonably possible.

Slovenia doesn’t need an international bailout. At the end of 2012, its public debt as a share of GDP was only 53 percent, and Slovenia is quite a highly developed country. The Slovenian government might be able to mobilize 8 to 10 percent of GDP for a banking bailout, though the yield of Slovenian 10-year bonds peaked at 7 percent last year. According to the IMF, Slovenia reduced its budget deficit to 3.8 percent of GDP in 2012. The IMF expects an increased budget deficit this year, but the reason is bank aid.

The government must put an end to the bleeding that depresses economic growth and foreign investment. The rising number of bad loans, exceeding one-fifth of their assets, should be set aside in a state “bad bank,” The healthy banks should be sold off as fast as possible to private bankers, presumably foreign buyers.

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