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Europe

Is Slovenia next on the bailout list?

Slovenia could become the next EU country to request an international bailout. Moody's has joined other rating agencies in downgrading the Alpine country's credit rating.

"Top of the class" and "a model student". That's how the German media described Slovenia when it joined the EU in 2004. Experts said hardly any of the nine other countries that joined the bloc that year - Poland, Hungary, Malta, Cyprus, the Czech Republic, Slovakia, Estonia, Latvia and Lithuania - were as well prepared for membership as Slovenia.

These days, however, the media is taking an entirely different view of the former Yugoslav republic. Headlines read "Euro crisis arrives in Slovenia" and "Does Slovenia need a bailout?"

On Friday, Moody's credit agency downgraded Slovenia's creditworthiness by three notches from "A2" to "Baa2," which puts the country just two steps away from junk status.

Slovenian officials last month ruled out needing a bailout. Speculation was fuelled last week when Slovenian Prime Minister Janez Jansa commented that the country faced a "Greek scenario" if parliament failed to approve legislation limiting public spending. The country's finance minister said there was "no need to ask for EU help" and the head of the Central Bank has declared that "at this point, we don't need help."

But Hermine Vidovic of Vienna's Institute for International Economic Studies (wiiw) warned that a crisis could become a self-fulfilling prophecy. "One false statement by a politician is enough: The EU has become very touchy in that respect," she told DW. Spain and Portugal made similar statements shortly before entering official applications for financial aid with the EU Commission, she said.

Great expectations

several EU member flags

Slovenia: independence in 1991, EU membership in 2004

Moody's on Friday joined other international rating agencies by lowering Slovenia's credit rating, which means deteriorating conditions for the country on financial markets. Loans for Slovenia have been slapped with a 7 percent interest rate.

A small, mountainous country nestled among Italy, Austria and Croatia, with a population of about 2 million, Slovenia was regarded as the most highly developed state in the Yugoslav federation. People came to Slovenia from southern Yugoslavia to find work.

In April 2004, ahead of the country's EU accession, Germany's "Stern" news magazine predicted Slovenia would "be the first among the new EU member states that pays more into joint coffers than it receives."

Shortly after joining the EU, Slovenia's economy experienced an upswing, with a building boom and banks in a position to borrow money on international markets at favorable conditions. However, debts began to mount up, both in the public and private sectors. People took on increasing amounts of debt, but then the founts of cheap money dried up and revealed the structural weaknesses in Slovenia's economy.

Structural flaws

Slovenian banks, in particular the country's biggest bank, Nova Ljubljanska Banka (NLB), faced a problematic lack of adequate capital resources. Political leaders have been unwilling to allow much foreign investment in the banking sector or the economy, arguing they wanted to "be masters in their own house."

people on strike with paper masks

Public workers on strike in Ljubljana

"That made it very tempting to use this bank as a political instrument," Vidovic said, adding a fatal alliance evolved between political structures and the country's biggest bank.

To comply with European Banking Authority (EBA) requirements that call for capital resources of 9 percent, NLB needed recapitalization of more than 380 million euros ($464 million). Slovenia managed to come to the bank's aid this time, said Jelko Kacin, a Slovenian member of the European Parliament. But he warned a new recapitalization is due by the end of the year.

"If that isn't successful, they might have to ask the EU for help," Kacin said.

That would mean that Slovenia would apply for funds from the EU's bailout fund. Observers estimate NLB would need 200 million to 300 million euros - and it's not the only Slovenian bank with a problem.

Austerity measures

Flagging exports are another issue - also a consequence of the inadequate opening of Slovenian markets to foreign investors, according to Vidovic.

"Slovenia's export structure isn't very good - there aren't enough high-tech products," said the economic expert. When comparing Slovenia with more recent nations to enter the EU, "it becomes evident that some of them allow more direct foreign investment and also have different export structures. They produce high-quality, technological goods."

The decline in exports is mirrored on the job market: The unemployment rate in Slovenia is at about 8 percent. That's still less than the eurozone average of 11 percent, but double what the country recorded before the crisis.

The government has decided to implement austerity measures - mainly cuts in public sector wages - to curb the development, hoping to save 500 million euros this year and 750 million euros in 2013.

That should lower the budget deficit from more than 6 percent to less than three percent next year. Slovenia hopes the cuts will help avoid having to apply for a financial rescue package.

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