Slovenia Bailout Would Be Spanish-Cypriot Mongrel

The ink on the provisional bailout agreement for Cyprus was hardly dry last month before bond markets shifted their attention to Slovenia, another small euro- area country with a banking problem. The Slovenian government’s borrowing costs subsequently shot up.

The fear that Slovenia might be the next Cyprus, with international creditors again forcing losses onto bank bondholders and uninsured depositors, is only partly justified. Slovenia isn’t Cyprus, and its rescue program, when it comes, will probably look like a hybrid between the Spanish-style bailout and the Cyprus-style bail-in.

First, the similarities: Like Cyprus, Slovenia has wrestled with a banking crisis for years and the big banks in both countries have made bad lending decisions. In Cyprus, that involved loading up on Greek government bonds that later had to be significantly written down. By the end of 2012, almost 27 percent of bank loans in Cyprus were nonperforming. Unfortunately, this was only slightly higher than in Slovenia, where nonperforming loans for the country’s three largest banks also rose quickly and surpassed 20 percent last year.

Slovenia’s bad loans were caused by a double-dip recession, a burst property bubble and poor corporate governance. The country’s three largest banks are all state-owned and the cozy relationship between politicians, banks and corporations resulted in many loans going to individuals and companies that were well-connected rather than well-qualified.

Crucial Differences

Yet there are crucial differences between the Cypriot and Slovenian cases. Cyprus’s banking sector was huge, accounting for more than 700 percent of the country’s gross domestic product by the end of 2012. By contrast, Slovenia’s banking sector is only 143 percent of GDP — much less than the 347 percent euro-area average.