Slovenia, hit hard by a boom-bust cycle and the euro area's debt woes, 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 capital instruments should absorb losses,” the Paris-based OECD said in a report today. State-owned banks such as Nova Ljubljanska Banka d.d. and Nova Kreditna Banka Maribor d.d. should be sold and non-viable banks should be wound down, it said.

“Limited equity markets and the backlog in the privatization program are hindering foreign direct investment, whose increase would help smooth corporate deleveraging,” the group of the world's wealthiest countries said in the report. “An agreement on a list of public assets to be privatized or managed by a new sovereign holding is still lacking.”

Slovenian banks, burdened by rising bad loans and relying on financing from the European Central Bank, are at the center of investors' worry the nation may follow Cyprus and other peripheral nations to ask for an international bailout.

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

The budget deficit rose “significantly” during the current economic 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 100 percent of gross domestic product, including the expected costs of aging and rescuing banks, the OECD said.

Bloomberg News

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Slovenia Faces &lsquo;Severe&rsquo; Banking Crisis, OECD Says

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Slovenia Faces ‘Severe’ Banking Crisis, OECD Says