| LJUBLJANA, April 9
LJUBLJANA, April 9 Slovenia, trying to avoid
becoming the euro zone's next bailout victim, may have
"significantly" misread the cost of fixing its troubled banks,
the OECD said on Tuesday.
Following last month's messy rescue of Cyprus, the country
of 2 million perched on Italy's northeast border is facing
intensifying market pressure while seeking funds to heal its
state-owned financial sector.
The Organisation of Economic Cooperation and Development, a
34-member club of wealthy states, said Slovenia should save
state-owned banks that were viable and sell them into private
hands and allow those that were not to fail.
According to an assessment made last year, the local banks,
mostly state-owned, are burdened with 7 billion euros, or a
fifth of Slovenia's annual output, in bad loans.
The country risks falling behind in its race to catch up
with Western living standards, the Paris-based organisation
It predicted a second straight year of economic contraction,
by 2.1 percent. It also noted public debt had more than doubled
to 47 percent of gross domestic product since 2008 and said that
could rise to 100 percent by 2025 with no new reforms.
Facing uncertain costs to bail out its lenders, continued
pressure on its exports from the euro zone crisis, and a rise in
lending costs after Cyprus's bailout, Slovenia had one of the
worst economic outlooks in the OECD, the organisation said.
"Against this difficult background and with a possible
further deterioration in the international environment, Slovenia
faces risks of a prolonged downturn and constrained access to
financial markets," the OECD said.
It recommended Ljubljana increase the powers of the
competition office, gradually raise the pension age, wean
wealthier citizens off family benefits, cut unemployment and
other benefits and improve efficiency in education and
SAVING THE BANKS
Slovenia is the only ex-communist European Union state that
declined to sell most of its banking sector into private hands,
a strategy that led to political influence, mismanagement and
disastrous lending that has now put the lenders at risk.
"Slovenia is facing a severe banking crisis, driven by
excessive risk-taking, weak corporate governance of state-owned
banks and insufficiently effective supervision tools," the OECD
The OECD said last year's estimate of the level of bad loans
in the banking system was outdated and created by methodology
that was weak and non-transparent, so the real damage could be
"Capital needs are uncertain and could in fact be
significantly higher," it said.
It welcomed a plan to create a "bad bank" to take
non-performing loans away from state banks but said "lack of
transparency and potential political interference pose risks".
It added that weak corporate governance and credit misallocation
could potentially be attributed to corrupt behaviour.
It urged Ljubljana to launch new stress tests of the banking
sector based on more robust methodology and publish the results,
before recapitalising distressed but viable banks, preferably
through share issues.
But it said market valuation showed equity in state banks
had been "virtually wiped out", and banks that were non-viable
should be wound down, with holders of subordinated debt and
lower-ranked capital instruments absorbing losses.
The OECD then said Slovenia should then privatise the banks,
and it criticised a plan being discussed by the current
left-of-centre government for the state to retain a blocking
minority, saying it could lead to political interference and new
It said failure to pursue reforms pledged when Ljubljana
tapped the dollar debt market last year could "significantly
raise borrowing costs", as could a higher than expected bill for
recapitalising banks. All of this put pressure on growth.
"Potential growth has fallen significantly since the outset
of the crisis," the OECD said. "As a result, Slovenia is
unlikely to resume the catching up towards more developed OECD