The Slovenia Times

Shaken, but standing solid

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Ironically, all those critics that regretted the relative underdevelopment of the Slovenian financial system at a time when investors in money centres from New York to London were rushing to buy innovative financial instruments based on real estate loans have been proven right. Securitisation of mortgages never took off in the country's financial markets; banks were forced to carry the majority of loans on their books, which - naturally - restrained their lending activity.

What had been a weakness proved to be an advantage once the financial bubble burst. At the height of the credit boom, banks in the country were much less leveraged than their counterparts abroad. Because they were not able to sell the loans and mortgages they extended to firms and households, they were forced to evaluate the risks more stringently and screen their clients more thoroughly.


Weak points

However, this is not to say that the financial and the ensuing economic crisis have not put Slovenian banks in a tight spot. Taking a look at the formidable pace of credit growth from 2006 to 2008, one cannot help but wonder where the banks got all that money they channelled into the economy. Since the deposits in their vaults were not sufficient to satisfy their appetite for loans, banks tapped international financial markets, either by issuing bonds or arranging syndicated loans with foreign banks.

The dependence of the Slovenian financial system on foreign funds thus rose dramatically (see chart). When the US real estate market imploded, however, these sources of funding suddenly dried up. With banks going belly-up all around the world, once generous providers of funds became very exacting and demanding, not only because they suddenly woke up to the benefits of prudent risk management, but because they had holes in their own balance sheets to plug.

This flight from risk hit Slovenia, too. Unable to renew their foreign loans, the country's banks had to start paying them back. Of course, that meant less money for firms and households; credit growth has been falling steeply for months now (see chart). The credit crunch quickly spread to the real economy, starving companies unable to rollover their loans of working capital and hitting the real estate and car markets.


Home-made troubles

It would be wrong, however, to attribute all the troubles Slovenian banks face at this moment forces beyond their control. It is true that banks cannot do much about the fall in export orders that could make some of the loans extended to the country's export-oriented companies go sour. The fact, however, that careless financing of domestic management buyouts (MBO) blew holes in their balance sheets, cannot be overlooked.

Istrabenz, a sprawling holding with interests in sectors as diverse as food processing and energy trading, and Pivovarna Laško, an drinks, retail and media empire, are a case in point. Their bosses first set up financial firms in which they owned controlling stakes and then proceeded to buy up significant stakes in both companies - with other people's money. In the heady times of the stock market boom, banks gladly accepted shares as collateral for MBO loans. When it became clear that share prices could not, if fact, only go up and losses started mounting in the wake of recession, the banks were stuck with a large pile of bad debt.


The state to the rescue

In 2008, the government pumped nearly half a billion euros of fresh capital into the two banks where it still holds sizeable stakes: NLB, the country's largest bank, and NKBM, the second biggest financial institution in Slovenia. These funds have not only come in handy as both banks have been writing down portions of their debt; they have also boosted confidence in Slovenia's financial system.

The latter is stable and solid, according to Banka Slovenije, Slovenia's central bank. The greatest challenge at the moment is thawing the credit freeze. It is not that the demand for loans is particularly strong; with real estate developers unable to sell their real estate and a battered export sector, that would be hard to expect. The economy, however, needs credit to function smoothly, so the government decided to help with hefty guarantees.

The success of those guarantee schemes has been mixed, as not all available funds have been dispersed. Still, the government can take some comfort from the fact that the sale of its treasury bills and bonds went smoothly. Most of the proceeds were deposited at banks, building up their deposit base just at the right moment. When the banks will start lending these funds to economy, however, is anybody's guess.

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