Successive Slovenian governments have refused to privatise the country’s banks, which made disastrous loans to politically connected business interests and now threaten to drag the country centre stage in the eurozone debt crisis.
Slovenia needs to recapitalise its banks and does not have the money
A span of unfinished apartment blocks in the Siska complex on the outskirts of Ljubljana is emblematic of the former Yugoslav republic’s woes. Alongside, Vegrad, a company once led by a well-placed politician, also planned to build a hotel, but got no further than digging an enormous hole.
An apt symbol, as Slovenia comes under growing pressure to seek a bailout to fill a financial hole, just as Cyprus did last month. The countries are different in many ways, but have at least two things in common: like Cyprus, Slovenia needs to recapitalise its biggest banks, and it does not have the money to do so.
Slovenia was the only former Communist state to refuse to sell most of its state-owned banking system after the fall of communism, so now it is taxpayers alone who must foot the bill of healing lenders after years of political influence and bad management loaded them down with bad loans equal to about a fifth of the economy.
Joze Damijan, an economics professor who was development minister in 2006, said state ownership meant a number of people and firms got special treatment from the lenders because of ties between political parties and the banks’ management.
In the case of the Siska project, Vegrad borrowed from Slovenian banks – it owes €107.8 million to the largest lender Nova Ljubljanska Banka – then defaulted. Vegrad’s CEO was Hilda Tovsak, a former top official in the conservative Christian Democrats, who Damijan said benefited from her connections.
A court sentenced her to 14 months in prison last month for arranging bids with two other construction firms for an airport control tower in 2008. She is also being tried for using money from a Vegrad-linked mutual fund in 2009 and 2010.
Tovsak has denied wrongdoing in both cases.
Media have reported that other bad loans are stacking up for the bank: €187 million owed by builder SCT, €100 million by construction firm Primorje, and €115 million by investment firm Zvon 1 Holding.
All three firms are now bankrupt. NLB disputes those figures.
Slovenia and Cyprus both joined the EU when the bloc launched its ‘big bang’ expansion, opening the door to 10 mostly ex-Communist countries in 2004, which then swapped their currencies for euros a few years later. But while banks in Cyprus suffered heavy losses due to large Greek bond holdings, Slovenia has virtually none. Slovenia’s bank sector is just 1.4 times as big as its economy, less than half the eurozone average.
But the source of the two countries’ problems are similar. One was the cheap funding that poured into Slovenia, Cyprus, Spain, Ireland and other eurozone periphery states that helped inflate real estate bubbles. In Slovenia’s case, this was exacerbated by a lack of adequate oversight in the state-owned financial system.