When you think about the European Union and bailouts, you likely think first of Greece, Italy, Ireland, Spain, or Portugal, some of the front-runners for a bailout (or an expulsion) from the EU. Lesser known, however, are other European nations that are either lining up for a bailout or doing their best to avoid it. Slovenia is one such nation: very poorly known outside of its own borders and neighbors, but threatening to collapse unless major economic aid or reform is put into place. What are the challenges facing the Slovenian economy?
Bine Kordez is a name not many westerners have heard of, but as his fortunes go, so may go the fortunes of the two million citizens of this central European republic. Kordez, an entrepreneur who turned a home-improvement store chain into a multi-million Euro operation, recently saw his company change hands to the tune of four hundred million Euros after a forced buyout. Kordez, who was thought to be on the fast-track to a position as a finance secretary or even the prime minister within the nation’s political sphere, now stands accused of crimes ranging from forgery to abuse of office — all under a sea of debt. As his company falters or even falls, it is believed that a major part of the Slovenian economy will go with it. What pushed him from greatness to likely ruin?
Like many stories since the financial crisis of 2008, the answer to Kordez’s problems, and those of Slovenia writ large, lies in easy credit. Slovenia, like many other European nations, relies on state-run banks in order to provide credit and lending to both private citizens and start-up companies. Kordez, who could face up to five years in prison for a conviction, greatly underestimated the risk factor in taking on massive loans. It is not entirely his fault: the state-run banks did as well, giving him large sums of cash at low interest based on very little substantial evidence that his operation could succeed.
This type of flimsy, built-to-collapse lending has become more typical in Slovenia in recent years, where corporate mismanagement and cooking the books have become the rule rather than the exception. Slovenia’s state banks are struggling under the huge weight of nearly seven billion Euros worth of defaulted or non-performing loans (about one-seventh of the nation’s GDP) and the result is a nation pushed into a new recession. Slovenia looks to follow the example of its closest neighbor Italy with a shrinking economy for most of 2013.
Trying to counteract poor banking decisions, the Slovenian government borrowed about four billion Euros from world banks, which was believed to be enough money to keep the government running for the rest of the fiscal year. Since the nation’s credit rating has been reduced to junk status, however, the Slovenian economy (along with other junk-status economies like Greece) will be between a rock and a hard place as it attempts to recover. Whether they seek emergency aid from the EU will likely determine the success or failure of a recovery.