Is Slovenia about to leave the Euro?

Slovenian Bond Yield Falls Below 7% as ECB Buys Italian Debt

Slovenia’s 10-year government bonds rose, pushing the yield below 7 percent for the first time in 10 days as the European Central Bank stepped up purchases of Italian government debt.
The yield fell to 6.964 percent at 5:14 p.m. in Ljubljana, according to Bloomberg data, after reaching a record 7.77 percent on Nov. 11. Analysts, including Michal Dybula from BNP Paribas in Warsaw said Slovenian government securities are “a victim” of the country’s proximity to Italy and the presence of Italian banks in the former Yugoslav republic.
“The premium fell because the yield on Italian securities fell below the 7 percent threshold,” Radivoj Pregelj, an analyst at lender Abanka Vipa d.d. said in an e-mail today. “Still, these high yield levels show that Slovenia got ‘contaminated’ in investors’ perception.”
Slovenia, which borders Italy, saw its borrowing costs advance after the rejection of pension changes in June, the credit rating cut by major ratings services in September and October and its failure to rein in spending. The country, which adopted the euro in 2007, faces an early vote next month after the ouster of the government of Prime Minister Pahor on Sept. 20.

My view:

Slovenia is a country that only recently emerged from a socialist planned command economy to a freer market economy once it declared independence from communist Yugoslavia in June 1991.

As a recent free market economy it adopted the Euro in January 2007, three years after becoming an EU member.

What is interesting about Slovenia is the rapid rate at which its finances have deteriorated with the Euro currency.  As the charts from Trading Economics indicate, the country has been running large deficits for much of the period since independence. 

Its GDP is now shrinking and unemployment is rising despite substantial (5 to 6% of GDP) deficit spending.  It appears that the bond market has caught on to these troubles and is now demanding higher yields, in the 6 to 8% range.  Quickly debts are ballooning out of control as the government debt chart shows below.

When one sees budget deficits in the 6% of GDP range it is important to put that in perspective.  Tax revenues in most democracies rarely exceed the 15 to 20% of GDP range. This means that if government deficit spending is 6% of GDP, than it is overspending tax revenues by one third or more. 
A country with a shrinking GDP can't afford to run large budget deficits.
At some point the bond market will simply shut the government out of the market.

I would be most interested if some of our Slovenian readers could contribute some anecdotal notes on the reality of living in Slovenia at the present time.


  1. Hey,

    Slovenian nation is small and known as hardworking with tendency live modestly, to build own house and have good middle class cars. Specially the first part of last thought differentiated Slovenians from other Ex-YU coutries.

    In years after leaving Yugoslavia, Slovenia became one of the fastest growing countries in Europe, quickly adopting all the good things out of open economy and later EU and the Euro. GDP growth, lower unemployment, higher standard of living, ... Human nature forced that modesty out of nation and some form of better life and greed prevaild. In time of roses (highest growth) and after privatization proccess, there were more and more bussinesses to use thy system in order to gain more capital.

    Unfortunately the world crises came first, banks had to collect rising interests on debt, system collapses from day to day. The worst goes to construction sector, which is complete disaster and banks of course. Connected to that,previous government did not need and the last did not have enough power to implement real structural reforms, Slovenia needs.

    and there we go down again.

    Nevertheless, I believe, that the first thought (hardworking) is still alive and that modesty is not forgotten, so the phoenix should have risen from the ashes soon. We have some good, successful companies and competent business leaders left ...:-)

    have a nice day,
    Slovenian guy, reading your interesting blog.

  2. Thank you for your candid insights Slovenian guy.
    It is always good to get some input from someone who has first hand knowledge of the situation.


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