European Commission warns of ‘excessive imbalances’ in Slovenian economy

The European Commission has flagged the danger of "excessive imbalances" in Slovenia's economy, as the ex-Yugoslav republic seeks to save its banking system and avoid an EU bailout in the face of deteriorating market sentiment.

"In Slovenia, the risks for financial sector stability stemming from corporate indebtedness and deleveraging are substantial," the commission said, in identifying Slovenia and Spain as the most problematic of 13 states reviewed.

The report found “urgent policy action is needed to halt the rapid build-up of these imbalances and to manage their unwinding”.

Amid its second recession in four years, Slovenia has slipped into a major banking crisis as the number of bad loans on the books of major lenders has soared.

'Most urgent priority'
Those bad loans already represent a fifth of Slovenia's gross domestic product, according to the Organisation for Economic Co-operation and Development, which this week urged the government in Ljubljana to stabilise the country's banks as the "most urgent priority".

On Tuesday, the Institute for International Finance (IIF), which comprises 450 of the world’s biggest banks, urged Brussels to use the European Stability Mechanism to help Slovenia.

"Even at €10 billion, a precautionary facility would be considerably less, relative to GDP, than the regular stability support loans agreed for Greece, Ireland, Portugal and now Cyprus. Much less could do the trick, however," the IIF said.

With borrowing costs and credit-default swaps at uncomfortably high levels, prime minister Alenka Bratusek said on a visit to Brussels this week that her government was "working day and night" to save Slovenia's banking sector.

“The new government will do everything in its power to solve our problems on our own,” she said, pointing to the creation of a “bad bank” to absorb non-performing loans as a key step towards stability.