Slovenia can avoid an EU bailout


When Slov­e­nia joined the EU in 2004, it was the most developed among the coun­tries of Cent­ral East­ern Europe (CEE) and gen­er­ally con­sidered a suc­cess story of eco­nomic trans­ition towards mar­ket eco­nomy. Slovenia’s income level had already reached 80% of the EU’s average. Only six years later, Slov­e­nia has turned into a prob­lem case for the Euro zone and is named a strong can­did­ate for the next bail-out. The eco­nomy has re-entered into reces­sion in 2012, its bank­ing sec­tor is ail­ing and the gov­ern­ment per­sist­ently runs a primary defi­cit. What has gone wrong?

Slov­e­nia was hit by the fin­an­cial and eco­nomic crises in a way much sim­ilar to what other advanced eco­nom­ies exper­i­enced: an unsus­tain­able boom of the con­struc­tion and hous­ing sec­tor came to an abrupt end, the con­sec­ut­ive credit defaults forced domestic banks to delever­age, which in turn led to a tight­en­ing of credit that trans­mit­ted the crisis into the real eco­nomy. Slovenia’s bank­ing sec­tor was hit harder than other CEE’s because its biggest banks are still state-owned and had been badly man­aged prior to the crisis.

But it is not only the bank­ing sec­tor that is in bad shape: pen­sion sys­tem and labour mar­ket have long been need­ing struc­tural reforms, but these were delayed until 2011 – only to be vetoed in a ref­er­en­dum. Addi­tion­ally, the export-oriented Slov­e­nian eco­nomy suffered from the reces­sion in the rest of Europe and par­tic­u­larly in its biggest trad­ing part­ner Italy.

So all in all, Slovenia’s cur­rent situ­ation looks rather gloomy – and this pic­ture is not going to change overnight. Reces­sion will pre­vail for at least another year, the gov­ern­ment defi­cit is still much above the 3% Maastricht threshold and the bank­ing sec­tor is likely to need some more €1 bil­lion of fresh cap­ital.

But things are chan­ging in Slov­e­nia. Since 2012, a num­ber of reforms have been ini­ti­ated to tackle the most press­ing fin­an­cial and eco­nomic prob­lems. The newly foun­ded Bank Asset Man­age­ment Com­pany, a “bad bank” in fin­ance jar­gon, will take on bad assets and allow troubled banks to clean up their bal­ance sheets. A pen­sion reform adop­ted in Decem­ber 2012 increases the retire­ment age and will thus help to face the con­sequences of a rap­idly age­ing pop­u­la­tion. In the labour mar­ket, reforms have rendered work con­tracts more flex­ible and admin­is­trat­ive pro­cesses easier.

Slovenia’s reforms have been greeted by the EU and by other inter­na­tional organ­isa­tions as steps in the right dir­ec­tion. Though many of the meas­ures might turn out not to be suf­fi­cient, they could mark the begin­ning of a gradual pro­cess of restruc­tur­ing that will bring the country’s eco­nomy and fin­an­cial sys­tem back on track.

Slov­e­nia now has to pay the price for hav­ing delayed neces­sary reforms for too long. But even if Slov­e­nia man­aged to imple­ment its reform agenda as pro­jec­ted, it could still lose the race against time and end up ask­ing for a bail-out. This is where Cyprus enters the stage. The unco­ordin­ated and delayed res­cue plan for Cyprus has yet again squandered investors’ trust in the Euro area and made them look for the next vic­tim in the Euro dom­ino play.

The risk of con­ta­gion becomes vis­ible when look­ing at the long-term interest rates for Slov­e­nian gov­ern­ment bonds.  In March 2013, yields for 10-year bonds were still at 5.09%, but within little more than a month they rose to 6.33% and are now near­ing the psy­cho­lo­gic­ally import­ant mark of 7% above which a bail­out is said to be inev­it­able. Of course, Italy’s polit­ical crisis and draw­backs in the Por­tuguese reform agenda are not help­ing either.

The moment of truth for Slov­e­nia is likely to come at the begin­ning of June when the gov­ern­ment will have to issue new debt.

* Read more here.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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