Thursday, March 28, 2013
Could Slovenia be the next domino to fall?
With Cyprus set to plunge into a deep recession because of harsh bailout terms that target bank deposits, the big question is: which country could be next?
Attention is now turning to Slovenia as the next potential flashpoint in the eurozone debt crisis.
Slovenia joined the eurozone in 2007 and became the first post-Soviet era nation to take on the single currency.
At first, its banking sector grew rapidly, but since 2009, when Europe's debt crisis erupted, Slovenia's banks have been under siege and the biggest are struggling with bad loans that now equate to around a fifth of economic output.
It is estimated that Slovenian banks and companies need around four billion euro in special funding to remain solvent.
Slovenian prime minister Alenka Bratusek admits the nation's finances are in bad shape and has ramped up austerity to rebuild the banking sector.
But she stresses that Slovenia's troubles are not in the same league as Cyprus - which had a much bigger and more bloated banking sector.
While there is no request for a bailout yet, the cost of protecting Slovenia's debt rose around 0.49 per cent overnight in a sign that financial markets are nervous.
The recent focus on Cyprus has also brought the fate of Greece back into sharper focus.
It has received a number of bailouts since 2009, but given that the deep austerity is only having a minimal impact, there are concerns that Greek bank deposits could be targeted if another rescue is requested.
As a result, the share market in Athens fell close to five per cent this morning before recovering.
Currency strategist Kathleen Brooks says patience is running out.
"The appetite to continue with these bailouts is very, very weak from the kind of core countries in the eurozone," Ms Brooks told the BBC.
"Now what we know about Greece which obviously has been bailed out is that there is a lot of expectation they'll need to be bailed out going forward, and if that doesn't happen and a bail in if you like comes into play, then their banks could get hit as well, so their deposit holders could get hit."
The fallout from Cyprus, combined with new fears about Slovenia, is putting pressure on bigger nations like Britain and France to build their capital base to reduce potential exposure.
The caution about Cypriot contagion has also sparked open talk that, in addition to Slovenia, smaller economies such as Malta and Luxembourg could also be exposed.