Yet another euro member looks set to need a rescue. Like Spain and Cyprus, Slovenia has suffered a banking crisis. Bad debts of round €7bn, or 20% of GDP, have piled up thanks to a construction binge during the boom. A double-dip recession threatens to increase this figure. The bill for cleaning up the banks threatens to bankrupt the country, as Wirtschaftswoche points out, and to make matters worse, a political crisis is hampering efforts to address the problem.
Tentative plans to set up a ‘bad bank’ to get bad loans off the banks’ balance sheets have been put on hold, thanks to a political crisis. Prime Minister Janez Janša is facing corruption allegations and has lost his parliamentary majority as three parties in the governing coalition have refused to shore him up. There is now talk of a no-confidence vote.
“Early elections would appear the most likely outcome”, according to Timothy Ash of Standard Bank. The “flux in the political scene” implies further downgrades by credit-ratings agencies and raises the prospect of higher interest rates on Slovenian debt, making it even harder to fund deficits. Slovenia has enough cash to last until June, but at this rate it will need the rescue fund to step in soon afterwards.