Slovenia, hit hard by a boom-bust cycle and the euro area's debtwoes, faces a “severe” banking crisis if it doesn't act quickly,the Organization of Economic Cooperation and Development said.

The Alpine nation should recapitalize “distressed, viable banks”while holders of subordinated debt and “lower-ranked hybrid capitalinstruments should absorb losses,” the Paris-based OECD said in areport today. State-owned banks such as Nova Ljubljanska Banka d.d.and Nova Kreditna Banka Maribor d.d. should be sold and non-viablebanks should be wound down, it said.

“Limited equity markets and the backlog in the privatizationprogram are hindering foreign direct investment, whose increasewould help smooth corporate deleveraging,” the group of the world'swealthiest countries said in the report. “An agreement on a list ofpublic assets to be privatized or managed by a new sovereignholding is still lacking.”

Slovenian banks, burdened by rising bad loans and relying onfinancing from the European Central Bank, are at the center ofinvestors' worry the nation may follow Cyprus and other peripheralnations to ask for an international bailout.

The nation's three largest banks, Nova Ljubljanska, NovaKreditna and Abanka Vipa, may need as much as 2 billion euros ($2.6billion) of fresh capital, Fitch Ratings said April 5, when it cutthe ratings of five Slovenian banks and affirmed the ratings of twobanks with a negative outlook.

The budget deficit rose “significantly” during the currenteconomic downturn and restoring public finances has proved“difficult,” contributing to tensions in the sovereign bond market,the OECD said.

“With no policy changes,” public debt could double to exceed 100percent of gross domestic product, including the expected costs ofaging and rescuing banks, the OECD said.

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