Slovenia’s slow economic growth and ailing banks threaten to become the next major crisis for the European Union. Recently Moody’s and other credit agencies downgraded Slovenia to just above junk level, and many experts predict that the nation will soon need a bailout. Will Slovenia become the sixth EU member state to seek a bailout and if so how will that affect the rest of Europe?
Moody reportedly gave Slovenia “almost junk status” because of the bad loans in government funding and the banking sector. These loans are collectively worth billions of dollars and represent a big risk to the nation’s financial system. Slovenia’s three largest banks have recently request state-sponsored capital injections. Moody’s and other rating agencies have also noted that quickly rising interest rates for government bonds was also a major factor in their decision to downgrade.
According to Moody’s, the problem with Slovenia is their limited access to major financial markets and their ever-increasing refinancing costs. The major banks are also becoming more dependent on ECB (European Central Bank) liquidity. The three largest banks, (NKBM, NLB, and Abanka Vipa) require a financial injection that is the equivalent to 2-8% of the entire country’s GDP.
Options Are Disappearing
Slovenia’s situation is only made worse by weak economic growth. Even the local economists are no longer relying on their nation’s financial system to solve its problems. Instead, many agree that the only remaining options are seeking aid money for the banks or apply for a full bailout.
The bad loans are valued at an estimated 6-8 billion Euros. Cleaning up these bad assets has the potential to increase the deficit to as high as 28% of the GDP. As a result, the interest rates have been driven up to over 12%. With these interest rates, it is almost impossible for a country to finance itself without outside help.
Experts believe that Slovenia is too small to make the euro crisis significantly worse. However, having to bailout a sixth nation would be quite inconvenient for leaders in the EU. Since Moody’s downgrading, the nation moved from 45th in global competitiveness to 57th, according to the World Economic Forum.
EU Trade Dependency
Slovenia’s economy is very dependent on exports. 72% of their exports go to other major EU nations like France, Austria, Italy, and Germany. The most profitable products are furniture, lumber, electronics, pharmaceuticals, chemical products, automobile components, and cars.
Slovenian politics are now facing upheaval as leaders try to decide what actions to take. Most feel that Slovenia needs to drastically cut its public spending, but austerity measures are deeply unpopular so politicians are tending to avoid it. Without stable leadership and a clear goal, interest rates will continue to soar.
The majority of outsiders believe that Slovenia’s best option is to form a technocratic government, similar to the steps taken by Greece and Italy. However, this should only be a temporary solution to make sure the banks receive their capital and that austerity measures are implemented. Most importantly, Slovenia should not waste times on complicated new elections and political stalemates.