Slovenia Averts Bailout but Crisis Far from Over

No bailout of crisis-hit Slovenia will be needed, the country's government and the European Commission said Thursday as results of long-awaited bank stress tests were published.

Slovenian central bank governor Bostjan Jazbec announced Thursday that the small eurozone state will need 4.8 billion euros ($6.6 billion) to recapitalize its troubled banks, citing the results of EU-supervised stress tests.

"Today we have proven and shown that we know how" to sort out our problems, Prime Minister Alenka Bratusek said shortly after the announcement.

The European Commission, which had requested the audit, also welcomed the results.

"Today it is clear that Slovenia can proceed with the repair of its financial sector without turning to her European partners for financial assistance," EU Economic Affairs Commissioner Olli Rehn said.

Eurogroup finance chief Jeroen Dijsselbloem added he "was reassured by the Slovenian authorities that they will use their own sovereign capacity to adequately cover the final capital needs of the banking sector."

Experts warned however that Slovenia's troubles were still far from over.

The small country, in recession since 2011, has been dogged for months by worries that it could become the sixth eurozone members to seek a bailout.

But Bratusek's government, which has set aside 4.7 billion euros to recapitalize its banks, has repeatedly said it will not need outside help.

Slovenia's banks became weighed down by assets whose value plunged amid the recession.

The country's three biggest state-owned lenders alone will need 3.0 billion euros, Jazbec said Thursday.

"The recapitalization of the three state-owned banks NLB, NKBM and Abanka will be carried out immediately after the European Commission's authorization," he added.

"After this recapitalization, Slovenian banks will be the best capitalized in Europe."

More work needed from government

Toxic assets will also be transferred to a "bad bank" that was established in 2012 but whose launch was delayed until the independent audit was completed.

So-called bad banks take the toxic assets off commercial banks for a fraction of their original value to allow lenders to resume their normal operations. They often make a profit when they later sell them after a crisis has passed.

The recapitalization and transfer of the toxic loans to a bad bank will leave the banking system in good shape, but Jazbec said that alone will not prompt economic recovery.

"That is why it is crucial for the government to continue implementing measures to enable a faster normalization of the economy to make it start producing profits," he warned.

Similar words came from Brussels.

"It is... critical that Slovenia move forward with the broader economic reform agenda, in particular strengthening corporate governance and carrying out privatizations and regulatory reforms to improve the business environment," Rehn said.

The International Monetary Fund said it was encouraged that the government plans to go farther than recapitalizing thebanks, with additional plans for "critical areas" including restructuring the corporate sector and privatization.

"Reforms in these areas would lay the foundation for a return to growth, and would help avoid reemergence of similar problems in the future," it said.

Maks Tajnikar, economy professor at Ljubljana University, however was less positive about Thursday's announcement.

The government will still have to tackle a corporate debt overhang that has been the main obstacle to recovery, he said.

"The only good thing about these stress test results is that they will stop the massive disintegration of the economy and will restore a little international confidence," Tajnikar told Agence France Presse.

"It will also create among citizens an impression that the government is capable of doing something."

Once a model European Union and eurozone newcomer, Slovenia has had a turbulent period with three different governments in three years, which delayed an effective response to the crisis.

True to form, center-right opposition leader and former prime minister Janez Jansa criticized the government Thursday, saying it had "only decided to patch up the banking system rather than restructuring it thoroughly".

To revive its sluggish economy, Slovenia plans to privatize 15 state-owned companies, including the airport and telecommunications operator.

Once it has fixed its state-owned banks, the government said it wanted to sell the second-largest bank NKBM, while keeping a 25-percent share in the largest lender NLB.

The whole set of measures to recapitalize the banking system will bring the country's public debt to 75.6 percent of gross domestic product next year, Finance Minister Uros Cufer said Thursday.

In 2008 when the global crisis started, it stood at just 22 percent of GDP.