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Slovenia Must Handle Its Banking Crisis!



The next euro country in possible need of an international stabilization program is not Italy but Slovenia. It is suffering from a moderate banking crisis. Newly appointed center-left Prime Minister Alena Bratusek argues that an international assistance program might not be necessary. She might be right, but only if the Slovenian government acts hard and fast.

Slovenia is a curious country. It was part of Yugoslavia, but it managed to sneak out with a minimum of violence and damage on the eve of the Balkan wars in June 1990. Since then, this small and orderly country of 2 million souls has identified with wealthy and stable Austria rather than the raucous Balkans. It has persistently been the wealthiest of the 10 post-communist countries that joined the European Union in 2004 and 2007.

Its post-communist transition was an anomaly. Untypically, it had carried out most of its market economic transformation while being a part of Yugoslavia. But it pursued fewer changes than any other Central or East European country after the end of communism. After many years of impressive success, its sins of negligence have caught up with Slovenia.

Slovenia's banking crisis has been brewing for years. As I pointed out in "Lessons from Slovenia's Curiously Unexpected Financial Crisis" on September 6, 2012, this banking crisis is quite different from those in Ireland or Spain, and I can add Cyprus.

Contrary to what is sometimes claimed, Slovenia did not have great leverage or experience any major credit-and-housing boom. Its banking assets increased from 136 percent of GDP at the end of 2007 to 147 percent of GDP at the end of 2012. That is less than half the European average. Both Cyprus and Malta have banking assets eight times the size of their GDP. Admittedly, Slovenia has the highest leverage ratio of all Central and East European countries, but it is also the wealthiest of these.

Slovenia's banking problem is not overleveraging, but failing state banks. Its difficulties are more reminiscent of the early post-communist banking crisis—most of all, the one in Bulgaria 1996. Unlike all other new eastern EU members, Slovenia never privatized its big banks. According to the International Monetary Fund (IMF), four state banks have a market share of 80 percent. Now the three biggest of these banks (Novaja Ljubljanska Banka d.d., Nova Kreditna Banka Maribor d.d., and Abanka Vipa d.d.) are in trouble, each one having suffered large losses in the last three years. The Organization of Economic Cooperation and Development (OECD) assesses their bad loans at €7 billion.

Another distinction of Slovenia is that the share of banking assets held by domestic (as opposed to foreign) banks is as large as 72 percent, while it is not more than 41 percent in any other Central and East European country (Latvia and Hungary), according to the European Central Bank. All other Central and Eastern European countries privatized long ago, and sold most of them to West European banks.

The problems are quite evident, and the Slovenian government, the IMF, the ECB and the European Commission are aware of them. The questions are only who will solve them, how, and when. The current government has barely been in office for a month, holding power through a weak minority of seats. It denies the need for immediate radical measures.

In this way, the situation is similar to Cyprus, where everybody waited for one year for the presidential elections last February. Slovenia must not repeat that mistake. The situation is not getting better but worse, as is almost always true in such cases. In its concluding statement from its March 2013 mission, the IMF states the key problems . The share of nonperforming loans in the three largest (state-owned) banks increased from 15.6 percent in 2011 to 20.5 percent in 2012, and one-third of their corporate loans are non-performing.

The IMF mission statement is exceedingly clear: "A negative loop between financial distress, fiscal consolidation, and weak corporate balance sheets is prolonging the recession. Prompt policy actions are necessary to break this loop and restart the economy. Repairing the financial sector and improving corporate balance sheets is the essence." The situation is complicated by "[c]ross ownership between large industrial groups, financial holding companies and banks and lengthy bankruptcy procedures." The IMF does not get much tougher than that in its public statements. Usually, this is called crony state capitalism.

The OECD (2013) has just published an economic survey for Slovenia. Its key recommendations for the banking sector are:

  • "Recapitalize distressed but viable banks…and wind down non-viable banks. To reduce the fiscal costs of bank resolutions, holders of subordinated debt and lower-ranked hybrid capital instruments should absorb losses."
  • "Privatize state-owned banks and do not retain a blocking minority shareholding."

This is a good start, but Slovenia should go further. It should apply the Cypriot template of haircuts for large uninsured deposit holders with more than €100,000. This is how the East European authorities successfully handled failing banks in the early 1990s.1 Moreover, many if not most of the large depositors are state companies that should be closed down or privatized. To tap their accounts would facilitate privatization which is better than billing the taxpayers.

The question is only who should take the initiative. The Slovenian government should do it, but it refuses to do so. The European banking union has not come into place as yet. The IMF has no powers to intervene. Only the ECB and the European Commission have sufficient means of pressure, and they had better intervene. They can and should demand that the Slovenian government close Nova Kreditna Banka Maribor d.d.

Last October, Nova Kreditna Banka Maribor d.d., was one of only four European banks that failed the soft capital adequacy test of the European Banking Authority. Two of the others were the recently failed Cypriot banks. This bank—owned 79 percent by the state and the second biggest in the country—should be closed down as soon as possible.

The largest bank, Novaja Ljubljanska Banka d.d., is much more difficult to handle. The IMF made a financial system stability assessment last October, with special attention to this bank. Its total assets in Slovenia are one-third of all Slovenian banking assets and 27 percent of GDP, but it also has large shares of the banking assets in four other former Yugoslav republics, namely Bosnia, Kosovo, Macedonia, and Montenegro, all poor and fragile new nations. The question must be asked whether this is really a sensible business strategy. If not, the foreign subsidiaries should be sold or closed down.

According to some recent conventional wisdom, taxpayers should bail out failing state banks. The IMF is currently suggesting a bank recapitalization of €3 billion, which corresponds to 8 percent of expected 2013 GDP. In a financial panic, such a cure may make sense but that is hardly true of present Slovenia. The three biggest state banks are obviously poorly managed. The government has already sacked the management of the two largest banks. It has set up a Bank Asset Management Company and created a sovereign state holding company. But it should not stop there. The government should close down or sell the four big state-dominated banks to the private sector as soon as is reasonably possible.

Does Slovenia need an international bailout? Not really. At the end of 2012, its public debt as a share of GDP was only 53 percent, and Slovenia is quite a highly developed country. The Slovenian government might be able to mobilize 8 to 10 percent of GDP for a banking bailout, though the yield of Slovenian 10-year bonds peaked at 7 percent last year. According to the IMF, Slovenia reduced its budget deficit to 3.8 percent of GDP in 2012. The IMF expects an increased budget deficit this year, but the reason is bank aid.

Sometimes an international bailout is necessary, but for Slovenia only if it manages its banking crisis poorly. The right approach should be to close Nova Kreditna Banka Maribor d.d. The other three big state banks could possibly be restructured, cleaned up, or otherwise closed down as well.

But quick action is needed. The government must put an end to the bleeding that depresses economic growth and foreign investment. The rising number of bad loans, exceeding one-fifth of their assets, should be set aside in a state "bad bank," as Cyprus is doing. The healthy banks should be sold off as fast as possible to private bankers, presumably foreign buyers. There is no reason for hard-working Slovenians to pay for privileged state bankers. The cost of a not very necessary international bailout could spiral high, as Cyprus has just experienced, if action is further delayed. This crisis should be nipped in the bud. Slovenia can still do so. Its government has no reason to wait.


Hansson, Ardo H., and Triinu Tombak. 1999. Banking Crises in the Baltic States: Causes, Solutions, and Lessons. In Financial Sector Transformation: Lessons from Economies in Transition, eds. Mario I. Blejer and Marko Skreb. New York: Cambridge University Press.

IMF (International Monetary Fund). 2012. Republic of Slovenia: Financial Stability Assessment. IMF Country Report No. 12/325, December.

OECD (Organization of Economic Cooperation and Development). 2013. OECD Economic Surveys Slovenia, April.

1. The best presentation I am aware of is: Hansson and Tombak 1999.

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