Slovenian Corporate Sector Faces Financial Crisis Amidst Abundant Credit and Declining Interest Rates
Ljubljana, Slovenia - A Financial Crisis Unfolds
The Slovenian corporate sector is facing a financial crisis due to plummeting domestic and external demand, leading to financial difficulties and associated increases in payment indiscipline and corporate bankruptcies. As credit dried up, the construction sector has been particularly affected, with two large Slovenian construction companies going bankrupt in 2011.
Household Sector: A Silver Lining
While the household sector boasts a relatively strong balance sheet, with assets exceeding liabilities by a large margin, there may be pockets of weakness among the lowest-income households. These households have seen their disposable income growth slow significantly since the 2009 recession. As a result, demand for mortgage loans has declined substantially in 2011.
Banking Sector: A Source of Concern
The Slovenian banking sector is facing significant risks to financial stability, primarily due to the negative macroeconomic outlook and high dependence on external funding. Credit risk represents the major vulnerability for banks, which could materialize through:
- Stagnant or shrinking export markets
- Weak consumer demand
- Delays in corporate financial recoveries
Real estate price risk is also of particular concern, with residential and commercial property prices having fallen by around 10% since their peak in 2008. Refinancing risk is another important risk facing Slovenian banks, which have historically relied heavily on wholesale funding.
European Central Bank’s (ECB) Long-Term Refinancing Operations (LTROs)
The ECB’s three-year LTROs have reduced immediate liquidity and refinancing risks for government-controlled banks. However, the balance sheet adjustment has some way to go. Some individual banks do not have much eligible collateral, which is a source of concern.
Conclusion
In conclusion, the Slovenian corporate sector faces significant financial challenges amidst abundant credit and declining interest rates. The banking sector must address its structural challenges to restore profitability and support sustained economic growth.