Investors afraid Slovenia will be next for bailout

Activists of the Occupy Frankfurt movement have set up a fireplace near the Euro sculpture in front of the European Central Bank in Frankfurt, Germany Nov.3, 2011. The ECB announced to lower their key interest rate to 1.25 percent. AP Photo/Michael Probst

(MoneyWatch) Now that banks have re-opened in Cyprus, investors and depositors are casting a nervous eye on other EU nations with severely outsized financial sectors and wondering which one could be next. So far, the tiny Balkan nation of Slovenia looks to be the prime candidate for a bailout.

Cyprus got into trouble because it attracted a huge amount of bank deposits and then invested much of them in Greek stocks and bonds. This happened in a great measure because Cyprus' population is overwhelmingly Greek and has deep ties with that nation. At the end of 2012 Cyprus' bank assets were equal to 716 percent of the nation's gross domestic product. When the value of those holdings plummeted it became clear the banks owed more than they were worth and that the government could not make up the difference.

There are a few other small European nations which also host outsized financial sectors. Most notable is Luxembourg where bank assets totaled 2,174 percent of GDP last December. Next is Malta, 792 percent of GDP, and then Slovenia, 143 percent of GDP.

Having a banking sector in excess of a nation's GDP is not in itself an indicator of a problem. For example, Germany's banks have assets worth 311 percent of GDP and Switzerland is at 482 percent. The key difference is that both have economies that are based on much more than just banking. In Cyprus banking was far and away the largest contributor to the economy. (By comparison U.S. banks were equal to 91 percent of GDP at the end of last year.)

In the past week Luxembourg has gone to great pains to point out how it is different from Cyprus. The government put out a statement saying it was concerned about recent "comparisons between the business model of international financial sectors in the euro area." It is not hard to see the differences.

The nation of 525,000 people, nestled between France, Germany and Belgium, has been a world financial center for decades. It has a huge number of different types of financial institutions, most of which service the very wealthy. There is no chance that all of these companies have primarily invested in a single entity, as was the case in Cyprus.

While Malta does have outward similarities to Cyprus, it too seems to be different in a number of significant ways. Like Cyprus its banking sector is about seven times of GDP but its financial firms are considered healthy and very conservative in their investments. Earlier this week the head of the nation's central bank said banks there have very limited exposure to securities from the most trouble EU countries.

Slovenia and its banks are making investors very nervous. The nation's economy is in very tough shape, having had two recessions in the last four years.

Prime Minister Alenka Bratusek, who was elected a week ago, said Wednesday that her administration would continue an austerity program in order to fix government finances and would rebuild ailing banks. The banks have been hit with a wave of bad loans because of the collapse of its construction industry. The bad loans now equal a fifth of the nation's GDP. According to the IMF, Slovenia will need $3.6 billion in funding this year and its banks will need another $1.2 billion.

It is getting much more expensive for Slovenia to borrow that money. The interest rate on the nation's 10-year bond rose to a record 6.382 percent Wednesday and at mid-day today was at 6.4 percent.

  • Constantine von Hoffman On Twitter»

    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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