Europe Economy

Slovenia Faces 'Severe Banking Crisis': OECD

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Slovenia is heading toward a severe banking crisis and a deep recession despite recent reforms, according to the latest economic survey of the country by the Organisation for Economic Co-operation and Development (OECD).

"Slovenia has been hit hard by a boom-bust cycle, compounded by reform backlogs and the euro area sovereign debt crisis," the OECD said in a report on Tuesday, adding that the government's attempts to reform the banking sector and reduce the country's debt pile were "weighing on growth."

"The reduction of public and private sector indebtedness is significantly weighing on growth amid tight financial conditions, growing unemployment and stalling export performance," the OECD said.

"Although important reforms have been adopted in 2012 and early 2013, additional and far-reaching reforms are needed as soon as possible to restore confidence and head off the risks of a prolonged downturn and constrained access to financial markets," it continued.

Slovenia, which has so far said it does not need a bailout, could soon face a funding crisis. The country must issue a bond by June 6 to meet its financial obligations, former Prime Minister Janez Jansa said in March. Analysts expect the country's finance ministry to issue a bond of at least one billion euros in the coming months because of outstanding debts that are due for repayment in 2013 ,which are estimated to total at least two billion euros.

(Read More: What Happened In Cyprus Will Happen Everywhere: Marc Faber)

Slovenia suffered a similar property crash to that in Spain and its mostly state-owned banks hold around 7 billion euros of bad loans, equal to about 20 percent of gross domestic product (GDP).

Jansa's government was replaced in March by a center-left cabinet led by Prime Minister Alenka Bratusek, which said it would continue the previous government's reform measures, including restructuring the country's beleaguered banking sector.

Despite the pledge to continue reforms, the OECD said the country faces a "severe banking crisis," "driven by excessive risk taking, weak corporate governance of state-owned banks and insufficiently effective supervision tools."

Though it welcomed the creation of a "bad bank" for impaired assets and the recapitalization of state-owned banks, the OECD warned that "the lack of transparency and potential political interference pose risks."

Economists have told CNBC that Slovenia could be the next possible recipient of a European bailout, although its debt pile is much smaller than Cyprus or Italy's, totaling 53.8 percent of gross domestic product (GDP) in 2012.

The OECD commended Slovenia for having embarked upon an "ambitious fiscal consolidation path" but warned that a deeper restructuring of welfare spending, a move that has caused widespread protests elsewhere in Europe, is needed to stabilize public debt and achieve fiscal sustainability.