04/12/2013 05:13 pm ET

Is Slovenia The Next Stage Of The Euro Crisis?

In the ongoing European financial crisis, another country has emerged as the focus of serious bailout concern. Slovenia is spooking global markets that it may fail to secure funds needed to bail out its three largest banks, which the head of the largest bank confirmed are collectively confronting losses of about $1 billion.

The latest sign came this week as the Slovenian government fell short on efforts to raise 100 million euro on the bond market, triggering a flurry of speculation that the country could soon become the sixth state in the European Union to seek an international rescue. Slovenia has asserted that it needs to raise a total of 3 billion euro (about $4 billion) to pay down its budget deficit and rescue its banks, lest a collapse exacerbate an already-weak economy.

Though Slovenia is home to only 2 million people and occupies a land mass smaller than the state of New Jersey, a breakdown within the country's banking system could become a global event -- first rippling across Europe and eventually around the world, experts said.

The prospect that Slovenia’s banks could fail has revived concerns about the sanctity of the euro, the currency shared by 17 member states. Financial strains in Greece have in recent years prompted borrowing costs to spike in much larger economies like Italy and Spain, as worry has proven contagious. The threat of collapse in tiny Cyprus -- a country with half the population of Slovenia -- sent shock waves across the continent before Europe and the International Monetary Fund stepped in with a rescue package that was formally approved on Friday.

Now, Slovenia appears at risk of repeating that dynamic.

“It’s another round of investors saying ‘Here we go again,’” said Andrew Birch, an economist who focuses on Slovenia for international research firm IHS. “‘Once Slovenia falls, what’s the next country to fall?’ After each bailout, the Europeans have kind of said, ‘This is it.’ But then you have Cyprus and then you have Slovenia. And the questions begin -- ‘What about Malta? What about Italy?’”

European leaders have expressed confidence that the Cyprus bailout ended concerns about a continent-wide crisis that could take down the shared currency, the euro.

“The so-called existential doubts about the euro are basically behind us,” European Commission President Jose Manuel Barroso told The Huffington Post on Friday. “We are much better from a position of stability than we were before, because we have avoided a disorderly default in Cyprus.”

Slovenian prime minister Alenka Batusek portrayed the situation as manageable during a press conference in the capital Ljublana on Friday, Reuters reported. Batusek said her government would raise additional funds through the sale of shares in state-owned companies.

“It is a fact that we have problems,” the prime minister said, according to Reuters. "We will immediately start processes to privatise one or two companies. My wish is that one of those would be a bank."

Much like crises in myriad other countries, the trouble in Slovenia stems from a collapse in real estate prices, which left the country’s three largest lenders teetering near insolvency. The government has already given financial aid to the banks in recent years, providing its largest financier with 243 million euro in 2011, while selling bonds to raise the needed funds. But the crisis in Cyprus has made investors skittish about buying those bonds. A report from the Organization for Economic Cooperation and Development published Tuesday added to concerns, asserting that the government has underestimated the size of the banks' losses.

Adding to the risks is a circular lending dynamic in which Slovenia’s own banks have been lending cash to the government -- the very funds the government has in turn lent to the banks.

“When a country can’t raise money from anywhere else, it’s banks feel obliged to play along and lend to it,” said Mike Van Dulken, head of research at London-based broker Accendo Markets. “Except in this case, the money is being raised to rescue the banks. It’s the same cycle you’ve seen elsewhere. Until they’ve gotten the international rescue.”

Ireland, Portugal, Greece, Spain and Cyprus -- in that order -- have received bailouts since 2008 from the so-called troika of international institutions made up by the European Union, the European Central Bank and International Monetary Fund.

If Slovenia winds up added to that list, it seems likely to add to anxieties centering on the balance sheets of any country with troubled banks.

“It’s adding fuel to the fire,” Van Dulken said.


Cyprus Bailout
Cyprus Bailout