As the Slovenian economy struggles with a recession and state owned banks are sinking into massive losses, the next big test for this Alpine nation will be whether or not her economy can survive without a bailout. Already, 48% percent of Slovenians are of the opinion that a bailout is needed. However, central bank governor Marko Kranjec recently said that that Slovenia does not require international assistance to deal with the financial crisis.
June 2013 is the month when the Slovenian economy will be thoroughly tested. Economic observers are watching to see whether the country is in a position to return €900 million to individuals who invested in 18-month treasury bills that will mature in June. In the worst case scenario, this will be the next euro-zone country requiring a bailout.
Prime Minister Alenka Bratusek responded quickly to the news that his country will sooner or later require a bailout. During his first policy speech after being elected, he assured investors that ailing banks will be rebuild therefore the country will not need aid. The words of Mrs. Bratusek have had little or no impact on the economy. Many citizens no longer have faith in the ability of the government to restore the economy. Two in three Slovenians are do not trust Bratusek’s cabinet.
According to an IMF report, this Alpine state requires close to 4 billion Euros, 3 billion to be used as government funding and 1 billion to serve as fresh capital. The government has the option of tapping international markets so as to meet financial obligations. However, if there is negative market sentiment against Slovenia, the government will have no other alternative but to follow Cyprus as the next European nation requiring bailout.
According to Slovenian government officials, comparing Slovenia with Cyprus is an invalid comparison. Present day economic developments in Slovenia are somehow similar to the monetary circumstances that confronted Cyprus prior to the 10 billion euro bailout. The common thread that connects both cases is unmanageable debt crisis.
In the past, banking losses forced Greece, Spain, Ireland and Portugal to bow to the pressures of European Union officials and accept bailout arrangements. The state of the Slovenian banking sector hints that a bailout is a bare necessity. State owned Nova Ljubljanska reported a €275 million loss. Over five Slovenian banks have failed so far and a number of financial institutions need additional capital from government.
Time is the greatest enemy of the Slovenian government due to rising bond yields. Fiscal consolidation matters must be clearly spelled out before it is too late to save the economy. The vague approach of government is doing more harm than good to the banking sector. Investors want to see concrete details of how banking industry will be fixed.
Slovenia is inching closer to a major banking crisis with each passing day and eventually an emergency-aid package offered by the EU and IMF may have to be accepted. Definitely, such a package will be the option of last resort. The economy needs tangible measures so that EU bailout is averted.