The particular focus of this text on the banking and debt crisis that is currently hitting Slovenia, is on the consequences of the process of Slovenia’s accession to the Eurozone and the EU, in order to highlight some problematic macroeconomic shifts witnessed by Slovenia in the wake of European integration.
The text will briefly depict the trajectory of the Slovenian economy in the last 20 years. For analytical reasons, the historical span is divided into 3 periods:
- the period of domestic accumulation based growth from 1994 till 2004;
- the period of debt fuelled growth from 2004 to 2008; and
- the period of crisis from 2008 till today.
1. Domestic accumulation based growth (1994-2004)
After a period of a sharp depression and high inflation in the early 1990s, the Slovenian economy witnessed a recovery and entered into a period of rather high economic growth and relative macroeconomic stability. Between 1994 and 2004 the average real rate of economic growth was around 4,1%; the sovereign debt was very low, never exceeding 30 % of the GDB; the foreign debt of the state was less than 10% of GDP on average; and the current account stayed roughly in balance during this period.
The development of the Slovenian economy in this period was largely based on domestic accumulation of capital, and the facilitation of the export-oriented domestic corporate base. Financing of investments in the corporate sector relied mainly on bank credit, which made the enterprises less dependent on the whims of capital markets. The domestic accumulation-based growth reflected a specific balance of class power in Slovenia. Namely, the strength of the emerging domestic bourgeoisie favoured domestic accumulation of capital over foreign capital based accumulation. Moreover, the organised labour was able to prevent, to a certain extent, the implementation of the continuous demands of foreign investors to loosen labour regulations, to cut wages, to dismantle the welfare state, to release the tax burden, and thus to create a “favourable environment” for foreign direct investments (FDI).
Thus, one of the specificities of Slovenian economy was its relative independence from foreign capital. The inflow of foreign investments was restricted for several reasons. Firstly, the privatisation process in the early 90s expedited internal buyouts of company shares, which favoured domestic owners over foreign owners. Secondly, the strength of the organised labour was reflected in relatively high wages that made the country less attractive for foreign investors. Last but not least, the policies of the Slovenian central bank, aimed at preventing the appreciation of the tolar (Slovenian domestic currency), limited the inflow of speculative capital and contributed to a limited inflow of FDI.
The second specificity was a rather unconventional exchange rate policy; a floating exchange rate was adopted. The bank of Slovenia could thus follow a policy of controlled depreciation of the currency, by means of which the competitiveness of the export sector was hastened, without the need to resort to policies of internal devaluation. A result of such monetary policy was a relatively high rate of inflation compared to other post-socialist countries in the region, but it seemed that the policy makers at that time were prepared to accept the risks of a bit higher rate of inflation for the sake of higher economic growth and employment.
The third specificity was, and still is, a large share of state ownership of the economy. Three of the biggest and strategically most important banks (NLB, NKBM and Abanka) remained state owned. The same goes for the public infrastructure and the biggest and strategically most important enterprises.
This kind of institutional framework and development from 1994 to 2004 allowed for some concessions for the Slovenian working class. Namely, the real wages were constantly rising, while unemployment was falling. Furthermore, the minimum wages and unemployment benefits in Slovenia were amongst the highest in the post-socialist Eastern European countries.
2. Debt fuelled growth (2004-2008)
However, after 2004 Slovenia witnessed a shift from domestic accumulation based growth to a debt fuelled growth. This shift coincided with the process of Slovenia’s accession to the EU and the European exchange rate mechanism (ERM II) in 2004, and the Eurozone in 2007. From 2004 to 2007, Slovenia witnessed an economic boom, based on accelerated economic growth. The GDP growth reached 7% in 2007, whereas the investments in the construction sector started to soar.
Yet, this course of development was only made possible by an unprecedented growth of credit. In only four years, from October 2004 till October 2008 Slovenian foreign debt rose for 24 billion euros, which is almost twice as much as in the whole previous history of Slovenia.
After 2004 Slovenian banks started to borrow extensively from abroad. Not much of this credit was directed towards the households. The vast majority of bank credit went to the corporate sector. Between 2005 and 2008 the average growth rate of credit to the enterprises was around 23%. The corporate debt was around 100% of GDP in 2005, but reached 144% in 2010, that is highly above the EU average. It is clear that the boom of the Slovenian economy after 2004 was based on a large scale growth of credit, acquired by Slovenian banks from abroad, and directed towards the domestic corporate sector, particularly towards the overheating construction sector.
To a certain extent this shift from domestic accumulation-based growth to debt-fuelled growth can be contributed to the process of Slovenia’s integration to the European markets. The massive inflow of credit to Slovenia from 2004 to 2008 was definitely speeded up by the entrance of Slovenia to the ERM II and later on to the Eurozone, since the process of accession contributed to the convergence of the interest rates towards the level that prevailed in the Eurozone. This enabled the Slovenian banks to get access to cheap credit from abroad, and caused the shift in bank financing from deposits to foreign capital markets. In 2005 the loans to deposits ratio was around 1, while it grew up to 1,6 in 2008. This shift made the Slovenian economy much more dependent on foreign capital.
Another important reversal after 2004 was a change in monetary policy, a direct consequence of the process of adoption of the euro. As soon as Slovenia entered the ERM II it had to peg the tolar to the euro. The pegged exchange rate ruled out the possibilities of central bank policies aimed at controlled depreciation or prevention of the appreciation of the tolar. The possibility to facilitate exports by means of nominal devaluation were thus ruled out. The only remaining option was that of internal devaluation. Furthermore, after 2007 Slovenia was forced to issue its debts in a currency that was beyond its control, which made the country much more dependent on the caprices of international financial markets.
Not incidentally, during this period, the export sector started to lag behind in terms of competitiveness, and the current account deficit started to rise. In January 2004 the current account deficit was only 2,4% of GDP, whereas it reached 6,1% of GDP in 2009.
3. Years of crisis (2008-2013)
When the great recession hit the global capitalist economy in 2008 and 2009, Slovenian economy witnessed a sharp fall in export performance (the exports decreased by 16,1% in 2009) and a devastating decline in economic growth (GDP dropped by 7,9% in 2009). The inflow of cheap credit from abroad grinded to a halt, and the bubbles in the construction and real estate sector burst. Unemployment started to rise swiftly: from 4,4% in 2008 to an unprecedented 9,6% in 2013. The living standards of the Slovenian working class started to deteriorate accordingly.
The highly indebted and leveraged corporate sector was caught up in an unfavourable situation of diminishing credit flows. As construction and real estate bubble burst and losses soared, the enterprises assets devalued. Since the enterprises were largely financed by bank loans, loses of the enterprises accumulated on balance sheets of the banks in the form of non-performing loans.
In 2010 the situation was made worse when the central bank of Slovenia increased the capital requirements for the banks. This contributed to a further contraction of lending activity. The credit crunch pushed many enterprises into bankruptcy and aggravated the losses on the banks’ balance sheets. After that, the amount of non-performing loans on banks’ balance sheets rose constantly till the end of 2013, when it reached around 8 billion euros (as for now, 1,1 billion euros of these non-performing were transferred to the so called bad bank).
The sovereign debt crisis that followed, was a logical outcome of the recession and the crisis rooted in the corporate sector. Before the eruption of the crisis, the sovereign debt was very low. In fact, the government debt to GDP fell from 27,4% in 2005 to merely 22% in 2009. Yet, after the recession in 2009, it started to skyrocket. It reached 35,1% of GDP in 2010; 38,7% in 2011, 47,1% in 2012; 54,4% in 2013, and is currently estimated around 72,5% of GDB. The increase of sovereign debt was mainly a result of declining tax revenues due to the fall in economic activity, and a parallel rise in welfare spending. The sovereign debt also rose due to government interventions into the banking sector. Namely, in 2009 the government mitigated the problems of liquidity in the banking sector by increasing states’ deposits in the main Slovenian state owned banks. In 2012 further state recapitalisations of banks took place.
The Slovenian sovereign debt crisis was aggravated after the turmoil in the Eurozone in the second half of 2011. In November 2011 the yields on 10 year government bonds rose above 7%. They exceeded the 7% limit yet again in January 2012 as well as in august 2012. The most critical period is over for now, since the yields on 10 year government bonds have fallen below 4% on the secondary market. However, insofar as there are no prospects for high growth in the near future, and seeing that problems in the corporate and banking sector are far from resolved, there are no indicators to suggest that the sovereign debt will disappear any time soon.
By Sašo Furlan