GO
Loading...

Euro Zone's Poster-Child Faces a New Crisis

View over Lublijana, Slovenia.
Michael Runkel | Robert Harding World Imagery | Getty Images
View over Lublijana, Slovenia.

Growing public protests, a mutiny among leading politicians calling for Prime Minister Janez Jansa's resignation, billions in bad debt, and an economic recovery on hold — just a few of the challenges facing Slovenia, a country once touted as a poster child for the euro.

Speculation had mounted in recent months that the country, which adopted the euro in 2007, will become the latest to succumb to the debt crisis and ask for a financial bailout. But that's been put on the back-burner, as the country faces immediate political disarray should Prime Minister Jansa lose the support of his party, after he was accused of corruption.

Jansa has already lost the support of two of the parties within the five-party coalition government, and on Monday, a third partner joined the calls for Jansa to resign, threatening to leave the fractious coalition if he does not.

A break-up of the government could lead to early elections or a technocratic government, as in Italy.

Since it joined the euro, the former Communist country has suffered a decline in exports and collapse in its property market similar to Spain and Ireland, leaving its domestic banks laden with billions of euros of bad debt.

(Read More: Could Slovenia Beat Spain to Be Europe's Sixth Bailout?)

The leader of the Slovenian People's Party Radovan Zerjav said on Monday that it expected Jansa to quit and to "propose a candidate to head the government that will enable us to carry out the needed reform measures." His comments echoed economists' fears that political instability is hindering an already slow reform progress.

Politics Could Derail Economy

The political muddle and rising tensions in Slovenia's political scene prompted Herman Van Rompuy to call on Slovenia on Jan. 10 to stress "the importance of political stability when undertaking major reforms and taking measures which are of strategic significance to the country."

Disagreements among labor unions and the coalition have meant that Slovenia has made slow progress on national savings programs, economic reforms and austerity measures, though it has so far resisted asking the European Union for a bailout, which would make it the sixth nation to do so.

A snap election could undermine an already unstable recovery though the Slovenian Finance Ministry was keen to stress that it was business as usual in government.

"We can confirm that at this moment, the Government and all of the ministries, including Ministry of Finance, are fully operational and with all the powers. In this respect the activities of the Ministry of Finance are running in accordance with its objectives, " an email from the Ministry to CNBC said on Tuesday.

"The crucial point amid these corruption allegations, calls for the [prime minister] to resign and talk of a technocratic government is that it raises political uncertainty and the possibility that economic reforms get left by the wayside … the risk is certainly there," William Jackson, emerging markets economist at Capital Economics, told CNBC.

In December the country's constitutional court threw out calls for a referendum on a so-called "bad bank" for the country's toxic real estate loans (similar to Spain's) stating that a bad bank was part of urgent measures necessary to ensure fiscal stability and boost the banking sector.

Bad Debt, but Still No 'Bad Bank'

Jackson agreed that Slovenia's domestic banks are "struggling" under the weight of bad loans — totaling some 6 billion euros ($8 billion).

"Banks are struggling to do this on the markets, so the government is needed — in fact, the government is trying to introduce a "bad bank" that will absorb around 4 billion euros of bad loans. The problem for the government is that, if the markets think that bank recapitalization will make the fiscal position unsustainable, then the government won't be able to finance itself —forcing it to turn to the IMF/EU," Jackson added.

Slovenia's budget deficit currently stands at 4.2 percent for 2012 though it aims to reach a target of 3 percent by 2013 and 0 percent by 2015.

With a debt to GDP ratio relatively low at 53.6 percent in 2012, Slovenia is not in the same parlous position as other euro zone members such as Greece and Spain, whose debt to GDP ratios are expected to rise to 170 percent and 90.5 percent respectively in 2013.

(Read More: Eastern Europe 'Held Hostage' by German Slowdown)

Political tensions could prevent policymakers from making the necessary reforms amid favorable market conditions," Jackson told CNBC, meaning that they may need a bailout if market conditions deteriorate.

"Slovenia's public finances are already in a pretty bad state," Jackson told CNBC. "Admittedly, debt is much lower than much of the euro-zone. But the fiscal deficit is large," he said. "They seem to have got themselves into a vicious cycle of austerity, recession, lower-than-expected revenues and the need for more austerity. "

Contact Europe: Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More