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Slovenia doesn't need a bailout, but if bond yields stay high it should take one anyway, for its own sake and for the good of the euro zone.
At first glance, Slovenia is a strange country to find itself in the market's crosshairs. Its sovereign debt totalled just 54 per cent of GDP last year, less than Germany's. Its budget deficit was 3.7 per cent of GDP, less than France's, and it does not have an overgrown financial sector. Banking assets amount to 140 per cent of GDP, less than half the euro zone average.
However, the economy is in a funk, reeling from a lack of competitiveness and the aftermath of a construction boom. Companies are overleveraged, and banks are bogged down with bad loans. Last year GDP fell by 2.3 per cent and non-performing loans reached 14.4 per cent of the banks' loan books. The International Monetary Fund expects a 2-per-cent GDP decline this year. Government debt is rising quickly, not helped by bond yields nearly five percentage points higher than Germany's.
Slovenia has started to respond. Last year the government slashed spending and wages and pushed through labour and pension reforms. But more is needed. A plan to set up a bad bank to clear out problem loans and restructure the corporate sector is still embryonic. Privatization is needed to attract foreign investment and shrink the state's role in the economy. The IMF bemoans a "misconceived" reluctance to privatize.
The other problem is politics. The last government collapsed earlier this year amid a corruption scandal after barely 12 months in power. Its fragile successor may not last. Slovenians worry that the bad bank will become a vehicle for the political and business elite to carve up the corporate sector or protect vested interests.
A bailout could help. A contingent credit line from the euro zone bailout fund, coupled with bond buying by the European Central Bank, would reduce borrowing costs for the government and the economy. It would also reassure investors that the euro powers will keep reforms on track.
After the Cyprus debacle, the leaders in Ljubljana might hesitate. But Slovenia has little more in common with Cyprus than a Mediterranean location. Besides, a successful bailout would lift spirits everywhere. The euro zone could do with some good news.