Slovenia should be ‘very nervous’ after Cyprus: economist

July 30, 2016

By GlobalPost WriterHolly Ellyatt, CNBC

Slovenia’s central bank governor Marko Kranjec speaks during a press conference in Ljubljana, on Apr. 2, 2013.
Jure Makovec

The decision by the Slovenian government to postpone a parliamentary vote on its budget deficit is the latest blow to the country's plans to overcome its crisis, with one economist warning the country could face the same fate as Cyprus.

On Tuesday, Slovenia's government decided to delay setting a cap on the budget deficit until late May, after political parties failed to agree on the level. The delay prompted questions over whether Slovenia, which is due to present a reform and bank recapitalization program to the European Commission on May 9, is committed to implementing spending cuts. It also increased concerns that the country could be the fifth euro zone country to need a sovereign bailout.

"Slovenia is much more related to what's going on or went on in Cyprus and I would be very nervous if I was Slovenian – because there is a precedent of bad banking management and a tax on people's deposits," Elena Panaritis, an economist who is chief executive and founder of Thought4Action, told CNBC on Wednesday.

Like Cyprus, Slovenia has been warned by a number of high-profile institutions, including the Organisation for Economic Co-operation and Development (OECD), that its banking sector is facing a "severe crisis."

Slovenia suffered a property crash similar to the one experienced by Spain and its mostly state-owned banks hold around 7 billion euros of bad loans, equal to about 20 percent of gross domestic product (GDP). The government said it would establish a ''bad bank'' which will take over the impaired assets.

"I hope this time the European Union is going to come up with something a little less drastic [for Slovenia] than [taxing] the daily savings of people and should put the responsibility a little more with the financial markets and investment bankers frankly," Panaritis told CNBC Europe's "Squawk Box" on Wednesday.

Moody's downgraded Slovenia's government bond rating by two notches to Ba1, its highest "junk" bond rating, from Baa2 last week and said the outlook for the rating remains negative.

Moody's cited the country's banking sector, the deterioration of government finances and uncertain funding prospects as heightening the probability that external financial assistance will be needed. In terms of immediate financing, the country was given something of a reprieve in mid-April when the treasury sold more than twice the amount of government bonds it had hoped to and staved off an imminent funding crisis.

After the Slovenian vote on Tuesday, the vice president of the European Commission Olli Rehn said it was too early to say whether Slovenia needed aid. "We first want to analyze the programs [Slovenia presents] before commenting," Rehn said on Tuesday.