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Slovenia CBG looks to keep up recovery momentum

Slovenia's economy was in a precarious position, even by current European standards, as recently as 2013. The country's central bank governor, Boštjan Jazbec, explains how a return to health has been achieved through methods that were not universally popular.
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Slovenia CBG looks to keep up recovery momentum

Q: Slovenia’s banks are recovering from 2013’s crisis in the financial sector, when assistance had to be provided to the banks through bail-ins of deposits and subsequent bail-outs. How healthy is the banking sector now?

A: The banking sector today is much healthier than it was a couple of years ago, when we had to undertake some necessary measures, which of course generated an enormous burden for taxpayers. We had to go through the very thorough resolution process, which ended up with 60% of the banking sector being directly controlled by the government. We were the first country to put into effect the fully fledged state aid rules that derived from the communication act of the European Commission in August 2013. The measures were necessary but of course not very popular.

Banks today, after years of being undercapitalised compared with our European counterparts, have comparable capital ratios to other EU banking systems – of course, some banks are better than others. However, we still have issues with the legacy of the process, namely the rather substantial share of non-performing exposures.

Q: You mentioned non-performing loans [NPLs]. What is the current state of these problem assets in the Slovenian banking sector?

A: There is a lot of impatience [surrounding NPLs], some of which is systemically ingrained in the whole debate about NPL management. But there are positive signs. We are happy to support and coordinate the efforts for more effective NPL management.

However, with the lack of proper credit demand and credit growth, the balance sheets of the banks are contracting, and if your denominator is falling faster than your numerator, then of course you have a problem with the relative numbers. These relative numbers are not something that we would be happy with, but there are signs of positive developments and we hope that these trends will continue in the right direction. [Non-performing exposures for the banking sector are at 15% compared with a high of 20%.]

We make enormous efforts to find ways of soothing the problems of non-performing exposures. We used to think that every single indebted company should be sorted out and put back onto the market, while reality and the numbers show that some of these companies might have had to go bankrupt. And in small countries these problems are even more pronounced – it is the local particularities that sometimes give a flavour to solutions for problems that significantly differ across countries.

What is substantially different in Slovenia is that we don’t have a lot of NPLs relating to the real estate market, which I wouldn’t say are easier to resolve, but at least have some anchor in the value of the real estate. In Slovenia the main problem is NPLs in corporate and the small and medium-sized enterprises [SME] sector.

In March 2013, the Bank Asset Management Company [BAMC] was established in Slovenia in order to help facilitate the rather enormous amount of NPLs but it was mostly big corporate exposures that were transferred to the BAMC. So what remains on the balance sheets of the banks is exposures to non-residents and particularly SMEs, which are very difficult entities to deal with because of the size and volumes – rather small volumes, but big numbers. This demands a huge amount of coordination among the banks.

Q: Where do you see the Slovenian economy going in 2016?

A: There are very healthy parts of the Slovenian economy, which today generate the rather favourable macro-economic development in Slovenia. We are one of the most trade-integrated economies in the EU. We export 75% of gross domestic product and exporters are fully competitive on the European market. Those are the main reasons for the very positive developments in Slovenia’s economic outlook.

If you look at the data, the Slovenian economy should do fine in the immediate future. Banks are obviously eager to clean up their balance sheets of non-performing assets. The main challenge for the Slovenian economy, in my view, lies in bringing back investor confidence – domestic and foreign; that is, confidence in Slovenia having great potential and being a good place to invest. Personally, I am rather frustrated at how unsuccessful we are unlocking the potential we have.

Q: With a larger arsenal of measures available to central banks, some say central banks in general and the Bank of Slovenia in particular are now able to avert all future banking crises. What is your view on this?

A: History proves that whatever regulators and central banks do, crises still emerge. What we are doing today with the help of legislation is trying to prevent a repetition of the latest financial crisis.

Whether new crises will arise is a question of time because all crises have one common parameter and that is that somebody took too much money and is not able to return it. I hope the new regulatory framework will prevent more taxpayers’ money being spent.

Most Slovenians believe that the [latest] crisis happened because of the characteristics of the Slovenian transition and privatisation process. Most of them forget that we had just survived one of the biggest financial crises [of all time], which was not localised in Slovenia but was a world financial crisis and Slovenia was part of it. The new legislation and supervisory frameworks were nothing but an answer to problems that everybody experienced. I believe that, today, the financial system is much more robust than it was five to seven years ago; however, that still doesn't necessarily prevent the emergence of other problems.

Banks today have to have more capital, which is an answer to the issue of burden sharing. We need to protect taxpayers, so I am quite supportive of the measures. This is why we are requesting more capital today, this is why we are asking for banks to be more prudent about risk and this is the reason why we are trying to establish a level playing field, particularly across eurozone countries.

This also gives a healthy basis for the monetary policy of the single European market and makes the ECB effective in conducting common European policy. I would like to see other policies follow up on what we are doing at the European Central Bank [ECB]. Since November 2014, we have shared responsibility for supervision, and this is something that in my view is still missing in terms of other policies. We are talking about the elephant in the room: more synchronised and harmonised fiscal policies that could directly complement monetary policy and help make monetary and fiscal policies even more efficient in a still rather segmented Europe-wide economy.

Q: More harmonisation of fiscal policies is a difficult subject and easier for central banks to support than governments, because of the concession of sovereignty. How likely do you think it is that we will see movement there?

A: [If there is no willingness to come to a harmonisation of fiscal policies in the eurozone], if other policies are not fully synchronised with the general aim of having a single market and single European structures, then one should not expect too much from the central banks – but today it is the other way around.

As a cover-up for inefficiencies of policies in other areas, everybody is pointing towards the central banks, which of course have not exhausted the arsenal of measures that are there in case of things not being improved in time and in the right direction. [So] we should invest more efforts in trying to bring other policies onto the same level as [those of the ECB].

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Read more about:  Central & Eastern Europe , Slovenia