EU accession fuels a credit boom, then a bust

Slovenia's growth and credit charts show a clear inflection around its 2004 European Union accession and 2007 euro adoption, when rapid economic growth was fed by excessive borrowing and risk-taking by banks and enterprises, according to Banka Slovenije's own later account of the period. Banks relied heavily on external wholesale funding to finance this expansion, building up balance sheets that carried very limited equity capital relative to the credit they had extended, leaving the system poorly cushioned against any reversal. When the global financial crisis hit in 2008, that external funding dried up quickly, and Slovenia was pulled into what its central bank governor later described as a vicious cycle of shrinking credit availability, bank deleveraging, falling corporate investment, and rising non-performing loans. Growth and investment charts from 2008-2009 show a sharp break from the accession-era boom, and the asset-quality problems building up in the banking sector during these years, rather than being resolved, were instead carried forward and ultimately forced the far more disruptive recapitalization and resolution measures Slovenia had to undertake in 2013.