Slovenia, which is trying to avoid becoming the eurozone’s next bailout victim, may have “significantly” misread the cost of fixing its troubled banks, according to the Organisation for Economic Co-operation and Development.
But the OECD, in its latest survey of Slovenia’s economic outlook, said the country is not in immediate need of rescue.
The mostly state-owned banks have seven billion euros in bad loans and the OECD recommended that those that are viable be sold and sold into private hands and those that are not should be allowed to fail.
If not Slovenia is at risk of a prolonged downturn.
The OECD said last year’s estimate of the level of bad loans in the banking system was outdated and used methodology that was weak and non-transparent, so the real damage could be worse.
“Capital needs are uncertain and could in fact be significantly higher,” it said.
It welcomed a plan to create a “bad bank” to take non-performing loans away from state banks but said “lack of transparency and potential political interference pose risks”. It added that weak corporate governance and credit misallocation could potentially be attributed to corrupt behaviour.
The country risks falling behind in its race to catch up with Western living standards, the OECD warned, citing uncertain costs to bail out its lenders, pressure on its exports from the eurozone crisis, and a rise in lending costs after Cyprus’s bailout.
It predicted a second straight year of economic contraction, by 2.1 percent. It also noted public debt had more than doubled to 47 percent of gross domestic product since 2008 and said that could rise to 100 percent by 2025 with no new reforms.
“Against this difficult background and with a possible further deterioration in the international environment, Slovenia faces risks of a prolonged downturn and constrained access to financial markets,” the OECD said.
It recommended Ljubljana increase the powers of the competition office, gradually raise the pension age, wean wealthier citizens off family benefits, cut unemployment and other benefits and improve efficiency in education and healthcare.