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Assessment and recommendations

Slovenia has entered a double-dip recession and faces growing unemployment and heightened financial market stress (, Panels A, B and C). The pre-crisis boom, driven by easy access to external funding and excessive risk taking by banks and businesses, has led to a protracted bust, which is compounded by domestic structural weaknesses and the European debt crisis. Banks’ and firms’ balance sheets have been severely impaired and their necessary deleveraging is depressing growth, as credit is declining (, Panel D). Key banks, which are mainly state-owned, have required repeated recapitalisations to meet the regulatory solvency ratio for Tier 1 capital at 9% and their market value has collapsed. Public debt has surged from 22% of gross domestic product (GDP) in 2008 to 47% of GDP in 2011 and is expected to rise significantly more in the short term, partly driven by the rising costs of rescuing banks.

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