WASHINGTON – As soon as policymakers averted a crisis in Cyprus, another appears to be brewing. The latest country to provoke concern is Slovenia.
The small former Yugoslav republic took a beating Friday, with long-term bond yields spiking to 5.4 percent amid fears the country would need a bailout. Those aren’t crisis-level rates — Cyprus’ yields are around 7 percent, for comparison — but it’s certainly in the danger zone. How did Slovenia get here, and why?
It’s a small, open economy that joined the European Union in 2004 and quickly pegged its currency, the tolar, to the euro. In 2007, it adopted the euro.
During most of the 2000s, it outperformed the eurozone on growth. But it had a correspondingly large amount of debt.
Unlike many countries, which overdosed on housing debt, Slovenia had a problem with corporations financing operations through high levels of debt. An EU review found that in 2007 alone, private-sector debt grew by 23.5 percent and nonfinancial private sector debt grew more than 40 percent.
A lot of that debt went bad when the financial crisis hit in 2008. Slovenia’s economy took a sharp dive during the initial downturn — taking a bigger hit than the eurozone as a whole — and has underperformed relative to its monetary union partners during the recovery.
An International Monetary Fund report filed last week blamed “a negative loop between financial distress, fiscal consolidation and weak corporate balance sheets” for the country’s woes. Because corporations took out such large quantities of debt and are having trouble repaying it, banks are suffering too. For example, the IMF report notes that at Slovenia’s three biggest banks, the share of loans that are “nonperforming” — that is, in default or near default — grew from 15.6 percent in 2011 to 20.5 percent in 2012. Nearly a third of those loans went to private companies.
Meanwhile, Slovenia has followed the austerity fever spreading across the continent. Slovenia’s former prime minister, Janez Jansa, approved an austerity package early last year, including cuts to government employee wages and social benefits that he promised would cut the deficit to 3.5 percent of gross domestic product in 2012. It hit that target — excluding the cost of recapitalizing banks. But, in the meantime, the plan also caused tax revenues to fall as austerity measures battered incomes and reduced the tax base.
The proximate cause of the latest round of worries is the election of a new center-left government that replaced Jansa earlier this year. The new prime minister, Alenka Bratusek, has made it clear she cares more about helping the country grow than about reducing its debt load. That has led to fears that the country’s credit rating could be cut as its debt load stays the same or grows. That factored into Friday’s spike in bond yields.
The IMF says that the country needs about $3.8 billion in bond funding this year, about a third of which may go toward recapitalizing suffering banks. If bond yields stay high, raising that kind of money at a reasonable price could be difficult.
That could force the government to look to the European Central Bank, the European Commission or the IMF — or all of them — for a loan with below-market interest rates. In other words, a bailout.
Government debt was only 52.7 percent of GDP last year and is set to rise to 69 percent by the end of 2014. Compared with countries with their own currencies such as the U.S., and certainly compared to countries actually in crisis such as Greece, that’s a pittance. If Slovenia had its own currency, it would be a relatively easy problem to solve. But it doesn’t and so it finds itself on the brink.