Who says Austerity Doesn’t Work?



An Austerity Success Story in Slovenia

By Megan Greene, Bloomberg News

Jun 3, 2013 6:00 PM ET

Slovenia was among the first euro-area nations to run afoul of the macroeconomic imbalance procedure, a mechanism created in 2011 to monitor compliance with the currency union’s new rules. In April, the EU flagged the country’s high degree of corporate indebtedness. More than half of bank loans in Slovenia are to the nonfinancial corporate sector. Of these, more than 30 percent are nonperforming.

The Slovenian government responded with an ambitious reform program. Among other things, it pledged to inject 900 million euros ($1.18 billion) of capital into its three largest banks, and to move soured assets from these lenders to a bad bank, the Bank Asset Management Company, starting in June. Slovenian Finance Minister Uros Cufer also agreed to bring in an external auditing company to conduct an asset-quality review of the nation’s banks and to verify the size of the hole in this sector.

To raise money for the bank recapitalization, the Slovenian government announced it would sell 15 state-owned enterprises. This is even more ambitious than the Portuguese privatization program, widely considered to be the model for struggling euro-area governments.

Even in the worst-case scenario, the cost of recapitalizing the banks and funding the bad bank amounts to no more than about 10 percent of Slovenia’s gross domestic product. This would increase the government’s debt burden to about 75 percent of GDP, still less than that of most other euro-area governments, including Germany.

That said, the trends in Slovenia are worrisome. Public debt has more than doubled from 22 percent of GDP in 2008 to almost 55 percent in 2012. This is partly because an economic slump, expected to continue for at least another year, has been eroding the denominator, GDP. The share of nonperforming corporate loans at Slovenia’s three largest banks tripled from about 10 percent in 2009 to 30 percent in 2012. The banks’ distress will keep cutting into lending, pushing still more corporate borrowers to the brink.

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