By Marja Novak
LJUBLJANA (Reuters) - Successive Slovenian governments have refused to privatize the country's banks, which made disastrous loans to politically connected business interests and now threaten to drag the country center stage in the euro zone debt crisis.
A span of unfinished apartment blocks in the Siska complex on the outskirts of Ljubljana is emblematic of the former Yugoslav republic's woes, just as many such ghost neighborhoods in Europe's debt-choked south stand testament to the depth of the broader continent's economic problems.
The rows of buildings, housing 833 flats in all, stand mostly empty, casualties of a property boom turned bust and a subsequent recession. Alongside, Vegrad, a company once led by a well-placed politician, also planned to build a hotel, but got no further than digging an enormous hole. An apt symbol, as Slovenia comes under growing pressure to seek a bailout to fill a financial hole, just as Cyprus did last month.
The countries are different in many ways, but they have at least two things in common: like Cyprus, Slovenia needs to recapitalize its biggest banks, and it does not have the money to do so.
Slovenia was the only former communist state to refuse to sell most of its state-owned banking system after the fall of communism, so now it is taxpayers alone who must foot the bill of healing lenders after years of political influence and bad management loaded them down with bad loans equal to about a fifth of the economy.
Joze Damijan, an economics professor who was development minister in 2006, said state ownership meant a number of people and firms got special treatment from the lenders because of ties between political parties and the banks' management.
In the case of the Siska project, Vegrad borrowed from Slovenian banks - it owes 107.8 million euros to the largest lender Nova Ljubljanska Banka - then defaulted.
Vegrad's CEO was Hilda Tovsak, a former top official in the conservative Christian Democrats, who Damijan said benefited from her connections.
"The power of the director of Vegrad was very big. She had connections everywhere," he told Reuters.
A court sentenced her to 14 months in prison last month for arranging bids with two other construction firms for an airport control tower in 2008. She is also being tried for using money from a Vegrad-linked mutual fund in 2009 and 2010.
Tovsak has denied wrongdoing in both cases, and no evidence has been produced that Tovsak or Vegrad acted unlawfully in connection with the Siska loans. Her lawyer said she was not available to comment for this article.
Damijan left the government after only three months when he found that a plan to sell NLB was being undermined by political pressure to keep it in state hands where politicians could continue to exert control.
"I resigned because it became clear that there will be no privatization of NLB, that the state was determined to even increase control over it," he told Reuters. "It was already clear then that the state was a bad owner."
Media have reported that other bad loans are stacking up for the bank: 187 million euros owed by builder SCT, 100 million by construction firm Primorje, and 115 million by investment firm Zvon 1 Holding. All three firms are now bankrupt.
NLB disputes those figures but has given no other details, saying it cannot reveal client information.
Slovenia and Cyprus both joined the EU when the bloc launched its "big bang" expansion, opening the door to 10 mostly ex communist countries in 2004, which then swapped their currencies for euros a few years later.
But while banks in Cyprus suffered heavy losses due to large Greek bond holdings, Slovenia has virtually none.
And Cyprus faced criticism for hosting an offshore banking sector that was eight times the size of its economy by luring depositors, especially from Russia and Britain, who sought to avoid high taxes at home. Slovenia's bank sector is just 1.4 times as big as its economy, less than half the euro zone average.
But the source of the two countries' problems are similar. One was the cheap funding that poured into Slovenia, Cyprus, Spain, Ireland and other euro zone periphery states that helped inflate real estate bubbles.
In Slovenia's case, this was exacerbated by a lack of adequate oversight in the state-owned financial system.
"There was excess liquidity which blurred the judgment of some," said newly appointed central bank governor Bostjan Jazbec who will take over in July. "It is clear that in Slovenia we were not very successful in the management of the state companies."
The two countries also share the same vulnerability through their banks. According to the IMF, Slovenia will need to recapitalize its three largest, which are majority or largely state owned, by a total of 1 billion euros this year, or about 3 percent of GDP.
Last year non-performing loans reached 14.4 percent of the banks' loan books.
Repeated protestations by Ljubljana officials that "Slovenia is not Cyprus" echo other countries' efforts to calm markets before they too were forced into bailouts.
And while Slovenia still has access to international markets, investors have pushed its borrowing costs to above 6 percent, not far from the 7 percent considered unsustainable for a country to fund itself.
An opinion poll by Delo Stik in March showed 48 percent of Slovenians believed the country would not survive without international help, versus just 44 percent who thought it could.
"They say Slovenia is not like Cyprus, but I'm afraid things may get just as bad," said a woman named Nada, 63, who works part-time in a garden center. "They just told me this week that there is no work for me for at least two months. Who cares about flowers at a time like this?"
Prime Minister Alenka Bratusek, who took power after a wave of protests against graft and austerity helped topple the previous government, is pushing ahead with a plan to create a "bad bank" to quarantine 7 billion euros in non-performing loans, most of which are burdening three main lenders, NLB, Nova KBM and Abanka Vipa.
The government must also inject up to 1 billion euros in new cash into the banks to lift their value and then sell them, although no date has been mentioned.
That cash must come from an overall 3 billion euros the government must borrow, a goal complicated by the crisis in Cyprus.
Conflicting statements from the top don't help, either.
Former Prime Minister Janez Jansa, ousted earlier this year, has said Ljubljana must issue a bond by June 6 or it would not be able to pay back a 907 million euro treasury bill coming due.
Last week, however, new Finance Minister Uros Cufer said the country could hold on until autumn to wait until markets calmed.
Cufer also said Slovenia could sell a major state asset this year. He gave no details, but the government has big stakes in the country's biggest telecommunications, fuels and insurance companies worth about 780 million euros at the moment.
Analysts are not sure who to believe. Although Slovenia sold enough debt at the end of 2012 to create a cash buffer that could last until about September, they said delaying a new debt issue until the last minute would be unwise.
"Post Cyprus, I think managing market and depositor sentiment is key ... Waiting for September or October is probably not a good thing," said Standard Bank head of research Tim Ash.
"They need to remain ahead of the market by really showing they have reform plans in place and can address the issues without resort to a Troika bail-out. Even then, it might not be possible."
(Editing by Michael Winfrey and Will Waterman)