OECD warns Slovenia to solve its banking crisis

The OECD warned Slovenia on Tuesday that solving its severe banking crisis should be the government's top priority and pressed officials to do more to stabilise the eurozone country's economy.

"Restoring the banking sector is the most urgent priority," the Organisation for Economic Co-operation and Development said in a report.

"Slovenia faces risks of a prolonged downturn and constrained access to financial markets. Additional and far reaching reforms are needed as soon as possible to head off such daunting outcomes," it added.

The report noted that important reforms and ambitious fiscal consolidation measures had already been adopted but warned that they relied "too heavily on temporary steps, across-the-board cuts in the public sector."

"Repairing bank balance sheets and ensuring the recapitalisation of viable banks are one of the important elements for stabilising the economy and, in particular, for a resumption of bank lending," the OECD said.

It welcomed the creation last year of a "bad bank," the Bank Asset Management Company, to ring-fence risky assets but warned that a lack of transparency and potential political interference posed other risks to its functioning.

"Recapitalise distressed but viable banks, preferably by issuing shares, and wind down non-viable banks," the OECD recommended in its report.

It urged the former Yugoslav state that joined the OECD in 2010 to privatise state-owned banks and to forego blocking minority shareholdings.

Slovenia's three-largest banks are owned by the state, which has recapitalised them several times, and more capital injections are expected due to a high level of risky loans accumulated during the pre-crisis boom.

The OECD, which groups the world's 34 most-developed economies, recommended that the Slovenian authorities adopt 15 measures to repair the banking system, strengthen its fiscal sustainability and boost potential growth through structural reforms.

In its latest forecast, the OECD said it expected the Slovenian economy to contract by 2.1 percent this year before expanding by 1.1 percent in 2014.