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 eurozone 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.

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.

Slovenia needs to recapitalize its biggest banks, and it doesn't have the money to do so.

The former communist state refused to sell most of its state-owned banking system, 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.

Special treatment

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 lenders because of ties between political parties and the banks' management.

In the case of the Siska project, Vegrad borrowed money from Slovenian banks - it owes 107.8 million euros (US$140 million) to largest lender Nova Ljubljanska Banka - then defaulted.

Hilda Tovsak, a former top official in the conservative Christian Democrats, was Vegrad's CEO. Damijan said the company benefited from her connections.

"The power of the director of Vegrad was very big. She had connections everywhere," he said.

She was jailed 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.

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.

Other bad loans are stacking up for the bank, it has been reported: 187 million euros owed by builder SCT, 100 million by construction firm Primorje, and 115 million by investment firm Zvon 1 Holding. All three companies are now bankrupt.

NLB disputes the figures but won't give details.

Slovenia and Cyprus both joined the EU when the bloc opened the door to 10 mostly ex-communist countries in 2004, which then swapped their currencies for euros a few years later.

Luring depositors

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 seeking to avoid high taxes at home. Slovenia's bank sector is just 1.4 times as big as its economy, less than half the eurozone 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 eurozone 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 Bostjan Jazbec, who takes over as central bank governor 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 International Monetary Fund, 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.