Saving Slovenia’s banks appears to be the key to saving Slovenia.SRDJAN ZIVULOVIC/Reuters
Six euro zone states are bailout victims. Slovenia may be the seventh.
Slovenia is in a double-dip recession. Its banks are a mess and its government is on the verge of collapse. The country has been hit by protests and strikes, one of which shut down the entire public service – 100,000 employees – last week. Because of the political crisis, economic reforms and bank rescue programs designed to stave off a bailout are in danger of going nowhere.
Slovenia's woes show that pockets of the euro zone and the wider European Union continue to fester, even if the worst of the crisis seems over. Cyprus is negotiating a bailout and Romania, which milled through three prime ministers and one president in 2012, is under an International Monetary Fund bailout program that was just extended. Greece, meanwhile, is far from fixed and the jobless rates in Spain and Italy continue to soar.
Slovenia pulled itself together after the wars fought among the Yugoslav republics in the 1990s and joined the European Union in 2004. Three years later, it became the first ex-Communist Eastern European country to joint the euro zone.
Slovenia, like Ireland, Estonia and Slovakia, was one of the region's small miracle economies. Bordered by Italy, Austria, Hungary and Croatia, the country of two million enjoyed booming trade in the past decade, with annual growth rates that ranged from 5 per cent to 7 per cent. The spurt was fuelled by debt, especially among construction companies, which embarked on the always risky build-it-and-they-will-come strategy.
The party ended in 2008 and Slovenia's downturn in 2009 was one of the deepest in Europe, battering its highly leveraged banks and corporations. The banks have already received one government bailout, worth €4-billion ($5.4-billion). The launch of another bank rescue plan that would see the non-performing loans hived off into a "bad bank" is under way. But the program has yet to be implemented, even though it is considered essential if Slovenia is to avoid a bailout.
The bank rescue project may be a victim of political scandal that threatens to bring down the government as early as next week. The scandal began earlier this month, when the country's anti-corruption agency accused Prime Minister Janez Jansa, of the Slovenian Democratic Party, of failing to declare €200,000 of assets.
He refused to resign and, last week, his junior partner, Civic List, bolted from the government coalition in protest, depriving the Democratic Party of its parliamentary majority. A vote of non-confidence may remove him , followed by a snap election.
"A coalition breakup would represent a hurdle for the implementation of the proposed bad bank, despite the law already being approved, as key implementation rules have not yet been set up," Jaromir Sindel, an economist at Citigroup, said in a note last week. "This would be of a particularly negative consequence, if the bad bank becomes the topic of any pre-election campaign."
Mr. Jansa has accused his foes of irresponsibility for demanding his resignation. The end of his government, he said, "would push Slovenia into limbo for several months. Slovenia would go bankrupt in that time."
Saving the banks appears to be the key to saving Slovenia. "The bailout is avoidable if Slovenia succeeds in resolving the banking problem," said Joze Damijan, an economist at the University of Ljubljana. "The present political crisis can make things worse and make financial markets nervous again, which might lead to the problem of refinancing and hence may potentially call for the EU aid."
Slovenia faces another rough year, even though its main trading partners (save Italy) should see tepid economic growth in the second half of this year. Slovenia's gross domestic product was down 3.3 per cent in the third quarter of 2012, compared with the same quarter in 2011. The unemployment rate, at 12 per cent, is above the euro-zone average, and last year's budget deficit was a hefty 4.2 per cent of GDP.
The austerity programs are designed to trim the deficit to 3 per cent this year but all bets are off if the government collapses and the banking crisis is not solved. The country is off to an inauspicious start to 2013: The finance minister was one of the ministers who resigned because of the corruption allegations against Mr. Jansa.