* Slovenia trying to avoid bailout, investors seek signs of
* Transformation from communism to market economy half
* Govt faces resistance to austerity, privatisations
* Banks central to changes
By Michael Winfrey and Marja Novak
LJUBLJANA, April 21 Igor Luksic, leader of the
Social Democrats in Slovenia's ruling coalition, disagrees with
the European leaders who say his country should privatise its
three biggest lenders to avoid the misery of another bailout in
the euro zone.
The political science lecturer who has lined his office with
portraits of Martin Luther King, John Kennedy, Mahatma Gandhi
and Che Guevara said his party would fight the move.
"We have always been against selling banks," said Luksic,
whose party is the second largest in Prime Minister Alenka
The banks in the Alpine former Yugoslav republic of 2
million people are a key reason why it showed up on the agenda
of Friday's Dublin meeting of the bloc's 27 finance ministers on
preventing a new eurozone debt crisis.
"Slovenia is facing serious challenges," EU Economic and
Monetary Affairs Commissioner Olli Rehn told Reuters on
Thursday, calling for decisive action to restructure and
recapitalise the banking sector among other urgent measures.
Financial market pressure on Slovenia has lain bare how this
tiny euro zone state achieved Europe's smoothest transformation
from a Communist economy to a market-based model: it only went
While former Soviet satellite states like Poland and the
Czech republic privatised big firms, slashed budgets, and pushed
through other reforms, Slovenia held on to public assets,
avoided cost cuts and repeatedly bailed out state banks after
escaping the violent breakup non-aligned Yugoslavia in 1992.
That has now become a liability for Bratusek who, after last
month's chaotic rescue of Cyprus, is scrambling to stop a spike
in Slovenia's borrowing costs and convince investors it can
change its ways and avoid insolvency.
Bratusek, who took power only four weeks ago, has pledged to
break taboo by imposing unpopular austerity measures and selling
at least one of the publicly owned companies that make up as
much as half of the economy, and possibly a bank.
Luksic stopped short of threatening to quit the coalition if
it privatised the banks, but the cabinet has not rejected its
predecessor's plan for Ljubljana to keep blocking stakes in the
main two ones, which experts say will prevent their sale.
The coalition of parties whose members range from
neo-liberal centrists to leftists, is not united on other
reforms either, and may face staunch opposition from voters.
"Slovenia did not embrace reforms because it did not have
to," said Borut Hocevar, an analyst at the daily Finance.
"Everything seemed fine on the surface until a few years ago
but now it is clear that banks were used as a tool of political
and economic elites and that Slovenia would be much better off
if it had sold them a while ago."
From its immaculate highways to the trendy shops and bars in
its capital Ljubljana, Slovenia resembles developed EU states
like Austria and Germany far more than its ex-Communist peers.
With living standards measured at 84 percent of the EU
average, it has leapfrogged euro zone laggards Portugal and
Greece and enjoys more than twice the standard of Serbia, from
which it split when it left the former Yugoslavia in 1991.
But, following a nasty downturn and spike in the budget
deficit, its once enviable debt levels have doubled to 54
percent of gross domestic product.
Last week the Paris-based Organisation for Economic
Cooperation and Development (OECD) warned the debt level,
fuelled by the cost of saving Slovenia's banks plus healthcare,
pension, and other costs, could reach 100 percent by 2015 if
Ljubljana does not embrace reform.
Luksic acknowledged his party might not prevail in its
attempt to stop the banks being privatised but said at the very
least the biggest bank Nova Ljubljanska Banka or NLB, should
stay in state hands, since it could become a big regional bank.
"This is the tool that the state, as a national state,
should use for promoting its perception of how the state should
develop," he said.
Foreign institutions have for years criticised successive
governments' for stifling competition and investment and say it
has avoided painful reforms that its regional peers embraced.
Spending by the state is about 50 percent of gross domestic
product, one of the highest levels of the OECD club of wealthy
countries. Governments have also repeatedly rejected foreign
bids to buy state-owned firms, most recently killing the sale of
leading grocery chain Mercator to a Croatian rival in 2011.
Protecting national interests, diplomats, business leaders,
and others say, is also tangled with corruption and cronyism in
Slovenia's small ruling elite and will be a hard habit to break.
"Whenever they want to keep something because they are
connected in some way with the business or a certain group of
people because they have interests in those businesses, they
always throw up this concept of national interest, when really
it's personal interest," a Western diplomat told Reuters.
"Everyone has convinced themselves that it's truly in the
best interest of the country to work in this way, because it
worked for 20 years and they were the model for the rest of the
former communist countries," said the diplomat who declined to
The combination of state ownership, a tight-knit political
network, and bad management helped trigger the lending spree
from state banks that, following a collapse in real estate
prices, has gone sour.
Bratusek plans to shift some of the 7 billion euros in bad
loans choking mostly the banks NLB, Abanka Vipa, and
Nova KBM, in which the state is either the majority or
a strategic stakeholder, to a "bad bank" in June.
The government must then pump some 1 billion euros of new
capital into them this year - the OECD says maybe much more -
with the aim of selling them, even though bankers, analysts and
diplomats say there are no prospective buyers for now.
It is not the first time the government has had to bail out
its banks. It has injected capital into NBL - which needs an
estimated 375 million euros this time around - on five separate
"It has been proven that foreign owners are better," said
Tomaz Boltin, the head of Slovenia's banking sector union.
Selling them "is the only way to cut the cycle in which banks
are used to finance the political and economic elite," he said.
But it may be hard to convince voters. It was a wave of
protests against austerity measures - and graft - that helped
topple Bratusek's predecessor.
"I think the government should not sell banks and other
state companies which are the property of us all," said Omar
Beckanovic, a retired builder at Ljubljana's main open market.
Although Bratusek can find support for the measures from the
centre-right opposition, parties within her own coalition could
oppose them, which could destabilise her fragile cabinet.
Another risk is the role of plebiscites in Slovenia, where
anyone can demand a vote to knock down a newly passed law by
gathering 40,000 signatures. Unions have used them to attack
laws on belt-tightening and state asset sales.
There are already signs Bratusek is softening on austerity.
In talks with unions, her government has trimmed a plan to cut
public sector wages to 158 million euros from some 255 million
envisaged by the previous, right of centre, government.
Last week, it postponed a debate in parliament on the fiscal
"golden rule" which calls for a balanced structural budget by
2015, and Luksic's party has said balancing the budget should
take longer to shield poorer Slovenes.
Andrew Page, Britain's ambassador to Slovenia said reforms
could require a significant shift. "The challenge here is not
just to bring one or two political parties with the Prime
Minister but actually to begin to change public perceptions."