Like Cyprus, which applied for an EU bailout in July, Slovenia is likely too small to dramatically intensify the euro crisis. Nevertheless, the prospect of having to support a sixth country comes at a particularly inconvenient time for European leaders. Given the limited resources of the permanent euro-zone bailout fund, the European Stability Mechanism (ESM), discussion has turned to whether the European Central Bank should begin making mass sovereign bond purchases. The bank currently says it has no plans to do so.


Damijan estimates the volume of bad loans at Slovenian banks to be between €6 billion and €8 billion ($7.3 billion to $9.8 billion). The clean-up of these toxic assets could bloat the budget deficit to between 20 and 28 percent of GDP and thus drive up yields on Slovenian bonds to more than 12 percent, he says.

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