Note from the LeftEast editors: this article has been published in collaboration with the new Balkan web-portal Bilten.org. Original publication in Serbo-Croatian is to be found here.
When the great recession hit the global capitalist system, the Slovenian economy witnessed a devastating decline in economic growth. In 2009 GDP per capita shrunk by 7.9%, the sharpest decline in the European Union (EU) after the Baltic states. The downturn was initiated by a sharp decline in domestic demand and export performance: exports decreased by 16.1% in 2009. The situation was exacerbated by a credit crunch, which pushed many enterprises into bankruptcy and aggravated the losses on banks’ balance sheets. Unemployment started to rise swiftly: from a record low of 6.3% in September 2008 to an unprecedented high of 14.2% in January 2014. Needless to say, the living standards of the working class deteriorated accordingly.
The root of the problem, however, lay in the corporate sector. Namely, after 2004 when Slovenia entered the EU and the European Exchange Rate Mechanism (ERM II), Slovenia’s banks started to borrow extensively from abroad. The vast majority of bank credit went to the corporate sector. Hence, between 2005 and 2008 the average growth rate of credit to enterprises was around 23%. The corporate debt was 101% of GDP in 2005, but reached 144% in 2010, much higher than the EU average. It is clear that the boom of the Slovenian economy between 2004 and 2008 was based on the unparalleled growth of credit, acquired by Slovenian banks from abroad, and directed towards the domestic corporate sector, particularly towards the overheating construction sector.
After the crash of 2009, the highly leveraged corporate sector was caught up in an unfavourable situation of diminishing credit flows. As construction and real estate bubbles burst and losses soared, the enterprises assets devalued. Since the enterprises were largely financed by bank loans, loses of the enterprises accumulated on balance sheets of the banks in the form of nonperforming loans. In 2010 the situation was made worse when the central bank of Slovenia increased the capital requirements for banks. This contributed to a further contraction of lending activity, and inflamed the credit crunch. Thereafter, the amount of nonperforming loans on banks’ balance sheet mounted constantly, reaching around €8-billion by the end of 2013.
In 2012 the Slovenian government came up with a splashy plan for establishing a Bank Asset Management Company (BAMC), also known as a “bad bank”. The objective of the bad bank is to clean up the banks’ balance sheets and thus supposedly enable the banks to start lending to enterprises once again. In short, the plan was for the nonperforming loans, that had piled up on the banks’ balance sheets, to be transferred to the bad bank, whereas the transfer is to be financed by state guaranteed bonds. The plan for the bad bank was met with some opposition on the left: a newly emerging left party, Initiative for Democratic Socialism (IDS) opposed the bad bank due to three major problems associated with its enactment.
The first problem concerns immense fiscal costs. Compared to the costs of an alternative scenario of meeting banks’ capital requirements, that is a direct state recapitalisation of the banks, the costs of transferring the bad loans from the Slovenian banks to the bad bank are substantially higher, since, in the first case, the banks’ capital increases for the whole amount of the money advanced, whereas in the second case, the capital is increased for a much smaller proportion. According to Gonzalo Caprirolo, the chief economist at the Ministry of Finance of Slovenia, the calculation made in 2012 showed that the funds required to meet the capital needs of the banks were approximately eight times lower than the funds required for the transfer of nonperforming loans to the bad bank.
The second problem is that, considering the fact that the banks from which the bad loans are transferred are not fully nationalised, the money poured into the system by purchases of nonperforming loans, also amounts to subsidising the private owners of the banks. In plain English, it involves a free transfer of public funds to private owners.
The third problem concerns the intention of the Slovenian government to utilise the bad bank as an anchor for privatisation of Slovenian enterprises and banks. Namely, with the purchase of the banks’ bad assets, a certain amount of shares of illiquid companies, held on the banks’ balance sheets, would be transferred to the bad bank alongside the nonperforming loans. Since the decree of the government is that the bad bank should sell the acquired bad assets in a 5 year period, this would result in a further privatisation of the Slovenian enterprises. Furthermore, the government made it clear that a certain amount states’ shares in the banks, will be sold to private investors, after they are cleansed of the bad assets. In other words, the costs of cleansing the banks are to be paid by the public, and after that the banks are to be privatised.
The first step towards the enactment of the bad bank were the stress tests in late 2013. The process of assessing the value of the nonperforming loans was dubious to say the least. For the cost of €20-million, paid from the public budget, three private agencies assessed the overall value of nonperforming loans in the 10 biggest Slovenian banks in but a few weeks, whereas the methods of computing the value were concealed from the public. Based on a somewhat calamitous scenario, implied by the results of the stress tests, the government swiftly decided to launch the bad bank and inject €3-billion into the two biggest state owned banks (NLB and NKBM), and an additional €0.5-billion into two smaller private banks. Currently, it is estimated that €3.3-billion in nonperforming loans will be transferred to the bad bank in exchange for state guaranteed bonds. As for now, the bad bank has already purchased around €1.1-billion of bad assets from NLB and NKBM. Needless to say, it didn’t take long for the leading staff of the bad bank to indulge in reluctant activities: some of the staff simultaneously acted as employees of the bad bank, and, through their private companies, as its advisors.
It goes without saying that the stance of the left in Slovenia was, that the bad bank shouldn’t have been enacted in the first place. But when the bad bank was formed and started its operations, the Slovenian left acknowledged that the process simply could not be reversed. Hence, some currents on the left proposed to utilise the bad bank for a progressive policy. Proposals, aiming in this direction can be found in the programme of the IDS, which demands the following:
1) No bad assets should be taken over from the privately owned banks.
2) The bad bank should not sell the acquired assets as envisaged by the government, but rather keep the shares of the illiquid enterprises, obtained along with the nonperforming loans. The bad bank would thus deleverage the enterprises in question, without selling them to private investors.
3) New boards for crisis management, controlled by the workers, should be formed. Their objective should be a recovery of the enterprises and a subsequent launch of production.
Contrary to the plans of the current government, the IDS has envisaged the role of the bad bank as an anchor for further socialisation and democratization of the economy. They demanded, that after the process of deleveraging, the assets of the enterprises are to be transferred to the Slovenian state holding (SSH), about to become the main manager of state capital assets. Contrary to the intentions of the current government, the enterprises controlled by the SSH, would remain state owned. Furthermore, state ownership would serve as a platform for democratisation of the state owned enterprises and a democratic transformation of the two pillars of investment coordination: state owned banking sector as a major source of credit and SSH as a major holder of equity.The first step towards the democratisation of state-owned enterprises would be an open book policy. Each worker should have full access to information concerning investment decisions and the use of funds. The second step would be the democratisation of management. The boards of directors would be democratically elected by the workers and local communities affected by the policies of the enterprises. The boards of directors and the workers would adopt an agreement concerning the development path of the enterprise. Additionally, the workers would be able to vote on all of the most important decisions of the enterprises, decide on the minimum and maximum wage, appoint the directors, etc.
Moreover, the IDS claimed that the democratisation of investment coordination necessitates a socialisation of the banking sector. Their claim was that the banks should transform into non-profit institutions, offering public services, ensuring finance for enterprises and working people. The democratisation of enterprise management would also be applied to the management of the banks and the SSH. The democratisation of the banking sector and the SSH would be a first step towards a democratic planning of investment. Instead of following the profit motive, they would democratically coordinate the allocation of loans and equity into different branches of production in accordance with the needs of the working people, industrial and regional development and job creation.
