Column euroschau: the fear of a sixth candidate

By Klaus-Rainer Jackisch, HR

It was a bad omen when the organizers at the European Central Bank set the two foreign dates of the Governing Council for 2012 last year. Twice a year, the train of the monetary authorities does not travel to Frankfurt am Main to the Eurotower, but to a member country to hold the council meeting there. The Governing Council met in Barcelona in spring. That was exactly when the Spanish banking crisis reached its peak.

You don’t hear good things from Slovenia

This week the Governing Council gathers on a pretty country estate near the Slovenian capital Ljubljana. You don’t hear anything good from this country either: Slovenia, nestled between Austria in the north, Croatia in the south, Hungary in the east and Italy in the west, only joined the euro in 2007. At that time, the former republic of Yugoslavia was considered a model student in the EU: The economy was booming, investments flowed and economic growth was the highest in the monetary union. Nobody thought of a crisis.

Today Slovenia is a rehabilitation case, so to speak the Spain of the Balkans. Similar to the Iberian Peninsula, there was heavy construction. A real estate bubble quickly arose with tons of bad loans. They currently amount to around six billion euros. That corresponds to almost a fifth of the gross domestic product. The three big banks that dominate the market are facing massive problems and urgently need fresh money: The market leader Nova Ljubljanska Banka (NLB) crashed through the stress test of the European banking regulator.

Many investors are suspicious of the political entanglements

Many observers are also worried about the development of the country’s debts: With a ratio of around 50 percent of gross domestic product (GDP), Slovenia can be seen in the euro zone at first glance. But the dynamic behind it is frightening. The share of GDP has almost doubled since 2008. In the bond markets, Slovenia had to put interest of around seven percent on the table for fresh money at times. That is why a planned issue has already been canceled.

After a long struggle, Ljubljana adopted an austerity package in the spring and wants to bring its many state-owned companies under the hammer. But investor confidence is gone. This is also due to the political entanglements between the old guard and the new rich in the post-communist country, which many investors are suspicious of.

Slovenia soon to be a candidate for EU aid?

In the summer, Janez Janša’s conservative government frightened the public with the threat of insolvency. An application for help from the euro rescue package was no longer excluded. In fact, the situation is serious: Ljubljana needs billions to rehabilitate the ailing banking sector. This week the Slovenian central bank lowered the economic outlook: The country is sliding even deeper into recession. Observers fear that Slovenia could soon be the sixth candidate for EU aid after Greece, Portugal, Ireland, Spain and Cyprus.

In this environment, the ECB Council is unlikely to feel particularly comfortable in the cute country estate near Ljubljana. Because the criticism of the controversial purchase program for government bonds is not ending either. However, ECB President Mario Draghi succeeded admirably in keeping the other member states in line. Only Bundesbank boss Jens Weidmann is still on the sidelines and gets one rebuke after another from Draghi. That shows how much the culture in the ECB has changed. Under the predecessors Wim Duisenberg and Jean Claude-Trichet, public exposure of a member state in the euro zone would have been unthinkable.

Draghi has an easy game of course. The Federal Chancellor also leaves her former economic advisor Weidmann out in the rain. Because it is clear to everyone: the policy of mutualisation of debts and money printing can no longer be stopped. From the point of view of those involved, another restructuring case like Slovenia no longer matters.