Slovenia Isn't Cyprus, Yet

When I saw him last week, Slovenian Finance Minister Uros Cufer had just sat through a grueling public presentation by officials from the Organization for Economic Co-operation and Development, in which they painted a grim picture of the state of affairs in his country. He was clearly in a foul mood.

I asked them the obvious question: In the wake of the Cyprus debacle, was Slovenia next for a bailout? OECD Deputy Secretary-General Yves Leterme said he thought that, at least for now, it did not need one. Cufer said nothing.

So I asked Cufer again after the presentation was over. He snapped back angrily: “We don’t need a bailout. I don’t care about Cyprus. We are in a comfortable position. I am sure we are going to deliver good results. Despite the turbulence of the markets, we can wait for them to calm down.”

The “comfortable situation” Cufer described includes the following, according to OECD data: Last year, Slovenia's gross domestic product shrank by 2.3 percent, and this year it is set to decrease by an additional 2.1 percent; unemployment was 10 percent in October, up from a low of 4.1 percent in October 2008. The country's 2 million population is ageing, and its younger and better-educated people are looking for jobs abroad.

Many Slovenes are furious with their politicians as a result of such a dire outcome for a country that was widely viewed as an East European success story.

Ever since Slovenia declared independence from Yugoslavia in 1991, the country has been ruled by people who came to power on the back of that virtually bloodless success. They have been rewarding themselves ever since. At least for the first post-independence period, there was a national consensus about Slovenia’s goals: The country should do everything to join the North Atlantic Treaty Organization and the European Union (both of which it achieved in 2004), and the euro (it joined in 2007).

Maybe, with all of this completed, Slovenia’s politicians thought they could rest on their laurels. The country was comparatively wealthy and most people had a high standard of living. With cheap credit, however, things began to change in the early 2000s. Not on the private level, but rather the corporate one. In such a small place, where everyone at the top knows everyone else, those running what were in effect state-owned companies, used their political connections to help them buy out the firms they managed, using the companies' equity as collateral.

The process was made easier by the biggest banks also being in state hands, a situation that facilitated the crony network of politics, business and the banks. The biggest of the state banks is Nova Ljubljanska Banka d.d., which is where Cufer worked until he became finance minister.

Borut Grgic, a businessman and former presidential adviser, says that from 2003 to 2009 Slovene managers were boasting how they would grow their companies into “regional superstars.” But he says, this was all to be done on borrowed money and based on unrealistic expectations of the consumer market in the Balkans. "Of course, the Balkan economies collapsed following the global economic financial meltdown, sales dried up, loans went unpaid and banks choked up and refused to lend more, and they had no more to lend anyway, and so from boom, the economy went bust.”

So “the entire boom of the early 21st century was fake and created on loans rather than vision and competitive products,” Grgic concludes.

The statistics are frightening. Today, 15 percent of loans held by Slovenia's banks are nonperforming. The six biggest state-controlled banks account for 58 percent of all outstanding loans, and of these 30 percent are nonperforming. Still, while this is the core of the Slovene problem today, Alenka Bratusek, the prime minister, told me in an interview that comparisons with Cyprus are absurd because of the drastically different sizes of the two countries' banking sectors. In Cyprus, banking represented as much as eight times gross domestic product before the bailout, and in Slovenia that figure is only 130 percent of GDP, below the euro-area average. “We are absolutely not Cyprus,” she says.

Ask anyone in Slovenia if, despite such protestations, their country will need a bailout and the answer is the same: No one knows. It could go either way, but it depends to a great extent on whether Slovenia’s squabbling politicians are prepared to work together to fix the problem. Bratusek thinks they will.

Aljaz Pengov Bitenc, a blogger and political commentator, is more skeptical. The necessary reforms, including cutting jobs in the public sector, will be so painful that he thinks some politicians might prefer a bailout. That way, they could blame others -- for example, Germany and the International Monetary Fund -- for the harsh measures being imposed .

“The threat of bankruptcy is very real,” says Bitenc. Beyond that, however, the “real problem is that we cannot survive on tourism and services. The industrial sector needs to start producing high-value stuff.”

Some Slovene companies -- such as Akrapovic d.d., a manufacturer of motorcycle exhausts -- already do that. Their core business is exporting high-end upgrade exhausts for fancy motorbikes. They have expanded their market from Europe to the U.S. and Asia, and sales are booming. One reason for that success may be that in these straitened times, many who might have upgraded to a new motorbike have gone for the cheaper option of souping up their existing bike instead. Turnover has risen 60 percent in the past three years, says sales director Michel Neven.

The problem is that there aren't enough nimble companies like Akrapovic and light-plane maker Pipistrel d.o.o., another Slovene success story. Optimists say the very existence of such small and medium-sized enterprises, producing high-quality goods so close to core export markets, such as Germany and Austria, shows what might be done in Slovenia.

Renata Salecl, a philosopher and commentator, says the country’s crisis has been overdramatized. Slovenes have been protesting about their corrupt politicians since December, but many agree with her that "speculative capital" is driving the current debate over whether Slovenia will be the next Cyprus. “Those who are playing with the future of nations are gambling on the downfall of countries and it becomes a self-fulfilling prophecy," Salecl says. We'll probably know within months if she's right.

Tim Judah, the Europe correspondent for the World View blog, is a correspondent for the Economist and author of several books on the Balkans.

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