France Arhar
mandate 6. 3. 1991−31. 3. 2001

Introduction

One of the factors that drove Slovenia towards independence was dissatisfaction with the monetary policy of the former common state, and more precisely the “intervention in the monetary system” that happened in Serbia, under the orders of President Slobodan Milošević. The “intervention” actually entailed additional money issuance via the SDK, bypassing the monetary policy decisions and responsibilities of the National Bank of Yugoslavia. In truth we should reiterate that the former common state had found itself in deep financial and economic difficulties by 1983, when a shortage of foreign exchange meant that it was unable to repay foreign loans, which led it to seek help from the IMF, which in keeping with the principle of conditionality imposed a series of conditions with the aim of recovering and resolving the financial and economic system. These measures were felt in various areas by all of the public, as doing business with the rest of the world came under extra controls where the primary concern was repaying foreign loans, while all the other needs of the economy and the people were ranked according to their necessity and importance to the existence of the individual and entire communities (this period saw the introduction of petrol rationing, which allowed individuals to buy 40 litres of fuel per vehicle each month, given that there was not enough foreign exchange to buy oil). In these circumstances a new foreign exchange law was passed, which required the majority of foreign currency inflows from exports of goods and services (up to 80%) to be transferred from bank accounts abroad to the National Bank of Yugoslavia’s foreign currency accounts abroad. It was this period that also saw problems arise in the repayment of foreign currency savings accounts held by residents at domestic banks.

At this time the Slovenian economy was better-organised than the rest of Yugoslavia, in particular because the majority of output was intended for foreign markets in the hard currency zones of Western Europe and North America. In their regular trade with the rest of the world, Slovenian firms developed three major ways of working with foreign partners: long-term industrial cooperation, which allowed business to be done via direct account relationships; contractual joint ventures with foreign firms in Slovenia; and the establishment of independent and mixed firms abroad, via which they largely placed their imports and exports of intermediate goods and also equipment. To make this approach to business perform even better, Slovenia established a special “interest group for doing business with the rest of the world”, via which trading in foreign currencies was undertaken on a supply-and-demand basis, and not at the official exchange rates set by the government, usually to the detriment of the export economy.By way of illustration, I should point out that 360 firms were established abroad, that Slovenian firms held 170 contracts for long-term industrial cooperation with the states of Bavaria and Baden-Württemberg alone, and that Renault, Citroën, Bayer, Deutz and a host of others came to Slovenia themselves.

Birth of the Slovenian state and Banka Slovenije

The democratic changes that took place in Slovenia in 1990, with the first free elections and the referendum in December of the same year, laid the foundation for the declaration of independence and, as part of this process, and independent central bank with its own currency. As was emphasised by the first freely elected prime minister of Slovenia, Lojze Peterle, even at the time of the referendum the government was committed to printing monetary reserves (Stali smo in obstali, 2021, Ljubljana, p. 3), which means that the government was counting on monetary sovereignty from the very start. Article 5 of the Constitutional Act Implementing the Basic Constitutional Charter on the Independence and Sovereignty of the Republic of Slovenia stated that on the day that the aforementioned act entered into force, Banka Slovenije was to begin work. Article 19 of the aforementioned act further stipulated that Banka Slovenije assumed the guarantee for all savings deposits and funds in citizens’ current accounts deposited in banks in the territory of the Republic of Slovenia that had previously been guaranteed by the National Bank of Yugoslavia.The guarantee for foreign currency deposits at the same banks that had previously been guaranteed by the former federation was assumed by the Republic of Slovenia. The same day on which the aforementioned act entered into force also saw the entry into force of the Bank of Slovenia Act, Article 2 of which stipulated that Banka Slovenije attends primarily to the stability of the currency, and the general liquidity of payments within the state and to the rest of the world. Despite the formal establishment of a new central bank of our own, Article 90 stipulated that dinar banknotes and coins were to remain legal tender in Slovenia until decided otherwise by the Assembly of the Republic of Slovenia. Article 68 stipulated that the currency of the Republic of Slovenia was to be determined by a separate law.

The aforementioned legal regulations gave rise to a sui generis situation: a new independent central bank had been created, but had not yet issued its own currency, and in fact Slovenia had joined a “unilateral monetary union with the former Yugoslavia”. The reverse process had occurred in Germany: 1990 saw the reunification of East Germany and West Germany, as a result of which the ostmark ceased to be legal tender. In his work Die D-Mark: eine Biographie (Berlin, 1998), Wolfram Bikerich states that West Germany’s stable deutschmark meant more to the East Germans than did its national anthem or flag. He wanted to emphasise the role that a stable currency plays in the life of the ordinary person as a store of value.To illustrate, I should mention that the situation that had arisen in Slovenia of an independent central bank without its own currency was not a first in history. For example, the Banque de France was founded in 1800, but only began issuing its own currency in 1848, the Banca d’Italia was founded in 1893 but began issuing currency in 1926, and the Banco de Portugal was founded in 1846 and began issuing currency in 1888 (The Future of Central Banking, Cambridge University, 1994).

Unilateral monetary union with the SFRY, and the birth of a Slovenian currency, the tolar

The establishment of an independent central bank in Slovenia was an illegitimate act in the eyes of the National Bank of Yugoslavia (NBY), which took it to mean the prohibition of the use of the dinar as a means of payment in the new Slovenian state, despite Slovenia’s assurances that it would uphold all monetary regulations, including those adopted in future by the board of governors in Belgrade. Among the important measures put in place by the aforementioned body was a decision to stop supplying Slovenia with dinar banknotes and coins, which given the high inflation entailed a shortage of money for daily needs and normal business. (For more, see: Janez Majce: Slovenski denar, Banka Slovenije, 2001) Given that the NBY was refusing to recognise the new situation in Slovenia, the board of governors in Belgrade also passed a resolution to stop the “donation” of dinar banknotes to Slovenia, which led to a shortage of banknotes, and resulted in Banka Slovenije deciding to return the 2-million dinar banknote to circulation, the note having been previously withdrawn.

Another unexpected development was the decision by German firm Hermes, which after the declaration of independence announced that it would no longer insure German receivables carrying political risk for business with Slovenian partners. Bearing in mind that Germany was the number-one trading partner of the Slovenian economy, this was unexpected, and highly unwelcome. Given the situation, a meeting was held with the Hermes leadership at the firm’s headquarters in Hamburg, at which Andrej Ocvirk, the deputy prime minister at that time, and I explained the situation, and asked them to reconsider their decision in light of the facts. An important contribution to clarifying events in Slovenia was made by Helmut Schlesinger, then president of the Bundesbank, who had earlier invited me to a long conversation in which we compared a whole range of information, some in connection with the former East Germany, which the Bundesbank had analysed in detail, and some in connection with Slovenia. His understanding of our situation and his hope for Slovenia’s goals played a vital role in the change of heart that Hermes had in early July, which sent an important signal to other similar institutions in Western Europe and North America. (Schlesinger had taken the helm of the Bundesbank when his predecessor Karl Otto Pöhl resigned in protest at the decision by politicians in Bonn to allow residents of East Germany to exchange 2,000 ostmarks into deutschmarks at parity and the rest of their money at a rate of two-to-one at the time of German reunification, because this exchange rate was supposedly unrealistic given the economic state of the former East Germany. One deutschmark fetched four or five ostmarks on the free market.)

In the 90-day period of the Brioni moratorium and the commitments made on its basis that all activities for issuing its own currency would be halted, Banka Slovenije made intensive preparations for X-day, when the Slovenian parliament was to pass a law on the new currency as the sole legal tender. During this time two meetings were held at Podrožnik Villa: on one side, Lojze Peterle, the prime minister, Janez Drnovšek, who had returned from Belgrade, and Professors Sachs and Lipton from the USA, and on the other side, me, as governor. The theme of the discussions was how to carry out the stabilisation process in Slovenia, and what Banka Slovenije had to do in the monetary field to make the process as successful as possible. Sachs was insistent that shock therapy was the best approach, based on a large devaluation of the national currency and the maintenance of a fixed exchange rate. I opposed this proposal, as a fixed exchange rate policy requires the central bank to buy and sell foreign currency.At that point Banka Slovenije did not have any foreign exchange reserves that would allow it to do any such thing, while the foreign exchange reserves held by the commercial banks were no more than USD 190 million or so. The banks also held large liabilities to foreign currency savers, who were unable to freely access their savings. Sachs’s response was to have no concern for the savers, and to send them to Belgrade, as the foreign currency deposits were guaranteed by the federal authorities. In other words, the proposal was rejected by my side, but my position also needed to be confirmed at the first meeting of the Governing Board of Banka Slovenije, which was held on 5 October 1991, just before the session of the National Assembly that passed the law on the currency of Slovenia, known as the “tolar”. At the same meeting the Governing Board also passed the memorandum on stability, the intention of which was to have the government and parliament express their views and make certain commitments in connection with the proposal of how to carry out a process of this type, as Banka Slovenije did not have powers in other areas of economic policy. In the concerns for the stability of the new currency, attention was drawn to two essential prerequisites that needed to be met if we wanted economic policy to perform optimally: the gradual and cautious adaptation of the economic system to a market economy, and a social pact with the trade unions on acceptable wage rises given current inflation developments, with a recognition that the mass of social benefits, pensions and public sector pay should be tied at sliding intervals to average wages in the economy. Unfortunately neither the government nor the National Assembly expressed their opinions with regard to this document and the guidelines for stabilisation policy.

Banka Slovenije was very clear in reiterating its views of monetary policy and presenting them to the public. The main proximate target was the quantity of money in circulation, as both the exchange rate and the interest rate, in contrast to stable demand for money, are categories via which it would be very difficult or even impossible for Banka Slovenije to help reduce inflation, which in the month of October, when the new Slovenian currency was issued, stood at more than 22% on a monthly basis.It was high inflation that meant the old Yugoslav currency, the dinar, was not a store of value. This role was played by foreign hard currencies, for which there was a grey market, where the exchange rate was set by supply and demand. When Banka Slovenije began converting dinars into tolars on 9 October 1991, a total of just over 8.5 billion tolars was exchanged, or about DM 265 million in countervalue. On 8 October 1991 Banka Slovenije also published its first exchange rate list, working from the tolar exchange rate against the deutschmark set by trading in “foreign currency rights” on Ljubljana Stock Exchange, which was conducted on the basis of supply and demand, and reached a level of 32 tolars to one deutschmark on that day.

As stated earlier, when the new Slovenian currency was issued Banka Slovenije did not have any foreign exchange reserves, which raised the question of how much confidence there would be in the new currency. We even discussed the possibility of Banka Slovenije raising a mortgage abroad on the basis of its real estate holdings in Austria. I should point out that after the Second World War there had been a dispute between the NBY and Ljubljanska banka about who would be the legal successor to Kranjska hranilnica, which was founded in 1821, five years after the establishment of the Austrian central bank. The dispute was resolved in favour of the NBY, which was then entered in the land registry in Vienna and Graz on this basis. Because I was aware of this case from the past, as soon as the Bank of Slovenia Act was passed in June 1991 I made contact with Pfitzner, an estate agent in Vienna, and proposed that title to the real estate be transferred to Banka Slovenije in the land registry. This action was successful, and Banka Slovenije thus became the owner of a number of apartments on Mariahilferstrasse and Otto Pappenheimgasse in Vienna, and also in Graz. Based on an assessment made in October 1991, Banka Slovenije would have been able to obtain a loan of several tens of million deutschmarks, which would have reinforced confidence in the new currency.

In later analysis in connection with public confidence, at its first meeting of 5 October 1991 the Governing Board also decided that there was no need for this borrowing, as confidence could only be built gradually, with a credible monetary policy that would lead to European stability and also the external convertibility of the new Slovenian currency. Instead of raising a foreign loan, to build up its own foreign exchange reserves the Governing Board passed a resolution that banks were required to sell 20% of all their foreign currency inflows to Banka Slovenije, while being free to dispose of the remainder on the foreign exchange market.

The conversion of dinars into tolars further agitated the NBY, who in the very first week after the conversion requested the foreign banks at which domestic banks held their foreign currency accounts to block these accounts and to transfer the foreign exchange to the NBY’s accounts. The foreign banks were contacted immediately by Banka Slovenije, who explained what kind of monetary reforms were underway in Slovenia, and in the end no foreign bank agreed to the NBY’s request. Given the actions of the foreign banks, the NBY then demanded that Banka Slovenije buy back all dinar cash placed in Slovenia in foreign currency, in the amount of USD 1.25 billion. Banka Slovenije did not accept this demand, and reiterated that holding the banknotes of any central bank means that the bearer holds an interest-free claim against the issuer, i.e. against the central bank, which means that Banka Slovenije had established claims against the NBY on its balance sheet for the dinars received during conversion. After various lengthy contacts with the NBY, with the help of Hajra Balorda, the Bosnian bank governor, and Jure Pelivan, the Bosnian prime minister, who had previously been a central bank governor and was a good colleague of mine, I succeeded in organising a meeting in Sarajevo on 26 November 1991 with the leadership of the NBY, headed by Željko Trbojević, the deputy-governor, and eight colleagues, whom I briefed on the new situation in Slovenia, which in mid-November had been highlighted by our side (Arhar, Ribnikar and Kranjec) to the IMF leadership in Washington, and proposed that the NBY should take the converted dinar cash at the earliest possible juncture. After lengthy attempts to convince them, my proposal was accepted, as a result of which on 3 December of the same year a team from the NBY arrived in Ljubljana to review the sum of converted dinars and to organise their transfer. The opportunity was taken to ask Banka Slovenije to assist the NBY on “logistics” with neighbouring Croatia, to remove cash from Zagreb to Ljubljana, where it would then be taken by the NBY. This was how we resolved the major problem of holding claims against the NBY for the converted dinars that would never be settled. Something else I should mention is that the prime minister took this opportunity to inform me that Bosnia and Herzegovina had nationalised Ljubljanska banka in Sarajevo at the request of Serbia’s President Milošević. I told Pelivan that I could not understand this decision, and that Slovenia intended to work with all former Yugoslav republics in the future, and to uphold all contracts and valid regulations. Milošević had earlier nationalised Ljubljanska banka in Serbia.

Monetary stabilisation was carried out in three phases: first with the reduction of the quantity of money in circulation, by Banka Slovenije requesting the commercial banks to repay around 6 billion tolars’ worth of loans that they had received from the primary emission by February 1992.In this way we succeeded in reducing monthly inflation to 11%. The second phase was the issuance of new money subject to demand. Monthly inflation had fallen to 2% by the end of the second phase. The third phase brought a further reduction in inflation, which by the end of 1995 had fallen below 1% in monthly terms, and had practically fallen to an annual level of 4% to 5% before the introduction of VAT in July 1999, even though incomes policy in particular was not pitched at stabilisation.

The moving tolar exchange rate, which each year was revalued in real terms towards inflation developments, and the restrictive credit policy with a positive real interest rate based on current inflation and a fixed premium (the base rate) helped to permanently raise confidence in the Slovenian tolar, which was evidenced in a rise in savings deposits at banks, which gradually surpassed foreign currency deposits. The base rate initially accounted for monthly inflation, but the horizon was then expanded to three months, and eventually to 12 months. At the same time, in light of the high inflation, the Governing Board also took the decision to have banks revalue their banking capital for annual inflation each year. This requirement was in force until the end of 2001, by which time annual inflation had fallen to 4% or 5%.

I should highlight two other important developments: on 30 September 1992 Banka Slovenije issued the first three proper tolar banknotes, and on 1 September 1995 Slovenia moved over to external convertibility of the tolar.

Recovery and resolution of the banking system

As I mentioned earlier, the outbreak of the Yugoslav debt crisis in 1983 saw the beginning of a difficult period for the whole economy, which was hit by recession. Between 1985 and 1990 Slovenia’s social product declined by 10%, and investment by 30%, while personal consumption in 1990 was lower than in 1985, and public consumption fell significantly in 1990 and 1991.Over the first nine months of 1991, when Slovenia declared independence, output fell by 11%.Manufacturers of machinery and equipment saw their performance deteriorate by 38% between 1986 and 1990. A shortage of revenues meant that there was a large deficit in the federal budget, which was financed by printing increasing amounts of money. The federal government had free access to the NBY, which fulfilled all its requests. This led to rising inflation, which by May 1991 had passed double-digit territory at the monthly level. There was a huge liquidity surplus at banks in Slovenia, which put it on the path to hyperinflation, while the public were losing confidence, which caused rising demand for foreign currency, the price of which in the grey market was up to 40% higher than the official exchange rate. In the end, before the declaration of independence, the situation was similar to that in East Berlin, where a deutschmark fetched four or five ostmarks, while the official exchange rate was parity. GDP in Slovenia amounted to approximately USD 5,500 per capita in 1990, or around USD 12 billion in total. In the same year the Slovenian economy’s exports to foreign markets amounted to USD 5.8 billion, 70% of which went to the hard currency zones of Western Europe and North America.

The situation as described was also reflected in the banking system, which at that time consisted of 32 banks, with a balance sheet total of around USD 4 billion. Thanks to the liquidity surplus, the banks were still in business despite the deterioration in their asset quality, but problems began when in October 1991 we embarked on the restrictive monetary policy, which led in turn to a pre-recovery procedure being initiated in September 1992 at Ljubljanska banka, the largest bank, with an 80% market share in transactions with the rest of the world. At the same time Slovenia reached an agreement with the World Bank to hire the Spanish expert Aristóbulo de Juan and his team to analyse the quality of Ljubljanska banka’s banking assets. His findings later served for the issuance of the recovery bonds. On this basis Banka Slovenije proposed to the government that it begin the bank recovery and resolution process as soon as possible, with government support, for which a special law was required, but it failed to gain majority support in the National Assembly. In these circumstances I met party groups in the months of September and October 1992, and tried to explain the situation that had arisen, and all the risks to the whole economy and to the public if the banks were to fail. Finally in November of the same year a special law was passed for the issuance of bonds in the amount of DM 2 billion, with a principal repayment moratorium of 30 years and quarterly repayment of interest of around 9% in deutschmarks. The bonds were issued with a foreign currency clause; at that time of reunification Germany was also seeing high inflation, approaching 5%, which meant that the annual market interest rate was between 7% and 9%.

It was on this material basis that on 27 January 1993 Banka Slovenije embarked on the recovery and resolution of Ljubljanska banka, in which bad loans were exchanged for issued bonds at parity. On 1 April of the same year the recovery and resolution process was initiated at Kreditna banka Maribor. The Ljubljanska banka in Nova Gorica, which was an independent legal entity, also needed recovery and resolution, where we were counting on it being attractive to the market, most likely a domestic or foreign bank. An international tender was therefore held in July 1993, in which six banks applied, and conducted their due diligence over the next six months. At the same time the City of Nova Gorica and the residents of Primorska raised a petition to take over the bank themselves. After the tender deadline none of the interested banks wanted to take over the bank, while neither the local authority nor any individual or business was willing to acquire a bank in difficulties. In this situation Banka Slovenije decided to minimise the opportunity costs by absorbing the bank into Kreditna banka Maribor, where the recovery and resolution process was already underway. This proposal was realised on the basis of a resolution by the Governing Board of Banka Slovenije. Dissatisfaction with this decision meant that demonstrations were held in Nova Gorica against Banka Slovenije, and more specifically against me, under the slogan of Primorska money won’t be spent in Prekmurje. Given this opposition, the parliamentary deputies from Primorska called an extraordinary session of National Assembly to discuss all aspects of this change of status. After long discussions things finally calmed down, and a quiet recognition of the new situation on the market was reached.

Alongside the three bank recovery processes cited above, there was also a linear recovery and resolution process underway at certain other banks. The National Assembly passed a law for the recovery of steelworks under which government bonds were issued in return for claims against the steelworks in Jesenice, Ravne and Štore, and were used in the recovery of Gorenjska banka, Koroška banka (based in Slovenj Gradec), and Banka Celje. A separate law was later passed for the recovery of Splošna plovba Piran, where the lion’s share of the loans were held by Banka Koper, which was recovered under the same model as the banks that had financed the steelworks. Another law was passed for claims held by domestic firms that carried out investment works abroad, mostly in high-risk countries, where the state purchased the claims, thus allowing the firms to repay their loans.

In the initial phase all activities in connection with the bank recovery and resolution were carried out by Banka Slovenije, but later a separate bank recovery agency was established to manage non-performing claims. Given that government securities on the balance sheet constituted risk-free assets, the banks faced lengthy problems with cashflow, which was merely symbolic given the nature of the securities, and thus their daily liquidity needs were addressed by Banka Slovenije via the intraday loan mechanism and additional controls, which required the preparation of a special report for each meeting of the Governing Board. The recovery and resolution process at the two largest banks was officially completed in July 1997.The Governing Board put special measures in place for the banks under recovery and resolution to assist them in maintaining daily liquidity.

In mid-June 1996 Banka Triglav, which had a market share of approximately 2.5%, found itself in liquidity difficulties, which prompted Banka Slovenije to propose bankruptcy, as unfortunately the bank did not hold any government securities as secondary liquidity in its portfolio that Banka Slovenije might have purchased to provide liquidity, while purchasing commercial claims was unacceptable because of the credit risk to Banka Slovenije. This development shook the Slovenian banking market hugely, and triggered a silent attack by the public on at least ten banks. In other words, there was the threat of a domino effect, as had happened in neighbouring Croatia, where 12 banks failed in a single month, and then a year later in the Czech Republic, during the currency crisis, when ten banks collapsed. In this difficult situation for Banka Slovenije, I called Hans Tietmeyer, governor of the Bundesbank, who immediately invited me to discuss matters together with his deputy, Johann Wilhelm Gaddum. The two of them explained to me the German model of bank resolution in this situation, which was developed in 1974, when Herstatt Bank collapsed, which resulted in the establishment of the Basel committee later the same year. The Germans established Liquiditäts-Konsortialbank on this basis, with capital provided by the savings banks, the private banks and the Bundesbank, each providing a third. In addition, the bank held an open credit line at the Bundesbank for DM 2 billion, and its formal director was Gaddum, the deputy-governor. The bank therefore existed on paper to help banks with their liquidity, provided that they were solvent. I presented this German model to the Governing Board, which at the same meeting adopted a Slovenian model as follows: With the aim of helping small and medium-size banks in the event of liquidity difficulties, Banka Slovenije would draw up a tender for secondary liquidity, in which any bank would be able to apply.For this readiness, Banka Slovenije would pay the bank a special commitment fee, initially 2.5%. Should a specific bank find itself in difficulties, on the basis of the secondary liquidity held by a selected bank Banka Slovenije would approve a liquidity loan to the latter bank, which that bank would extend to the bank in difficulties, which means that the latter bank would assume the risk of the collapse of the former bank. This would improve the systemic security of the banking system, and in the end the cost of readiness with secondary liquidity would be symbolic.

Establishment of Nova Ljubljanska banka and Nova Kreditna banka Maribor

The second paragraph of Article 11 of the Constitutional Act Implementing the Basic Constitutional Charter on the Independence and Sovereignty of the Republic of Slovenia contains the commitment that on the basis of the agreement on the legal succession to the SFRY, Slovenia would assume that share of the SFRY national debts pertaining to Slovenia, and the share of the debts guaranteed by the SFRY whose beneficiaries were legal entities established in the territory of Slovenia.Slovenia would also assume the appropriate share of the SFRY national debts whose direct beneficiaries could not be established.The Executive Council of the Assembly of the Republic of Slovenia was authorised to negotiate the assumption of the shares of the SFRY national debts.

By using this language in the Constitutional Act, Slovenia was communicating to the financial markets and creditors its clear intent to meet its share of international obligations, i.e. to fully uphold the generally recognised pacta sunt servanda rule.Given that Slovenia was established by a unilateral declaration, a great threat to its future in the financial realm came from the New Financing Agreement signed by the syndicate of 240 banks in the so-called London Club, which contained two clauses on joint and several liability and cross-liability that presented difficulties. The two clauses meant that upon the contractual maturity of the debt, foreign creditors could seek repayment from any debtor if the debt was not repaid in accordance with the amortisation schedule. The debtors covered by the agreement were ten Yugoslav commercial banks, together with the NBY. The agreement stipulated a moratorium on principal until the end of July 1994, while interest was to be repaid regularly. The parties to the agreement on the Slovenian side were Ljubljanska banka and Kreditna banka Maribor.The Slovenian government and Banka Slovenije were well aware of this risk, which in practice might have entailed Slovenian banks being blocked from their accounts abroad in the event of a an annuity payment being missed. Banka Slovenije therefore proposed to the government and the National Assembly that Slovenia also open a special account abroad into which it should begin transferring its quota of due interest.The National Assembly adopted this proposal, and Slovenia opened a fiduciary account at Dresdner Bank in Luxembourg, as Luxembourg law guaranteed that in the event of the bankruptcy of the bank these assets would be inviolable and would not form part of the bankruptcy estate. The aim was to show creditors that we wanted to be a legitimate business partner, to meet all of our obligations under the agreement, and to find a new contractual formulation befitting the new situation.

In July 1992 the government appointed a special negotiating team, with vice-governor Janez Košak alongside me. The London Club banks also appointed a special credit negotiating committee, which was chaired by the Chemical Bank of New York, alongside Royal Bank of Canada, NatWest from the UK, Société Générale of Paris, West LB of Düsseldorf and Sakura from Japan. Even before the first meeting of the negotiating teams, Dušan Vlatković, the governor of the NBY, asked me to meet in New York, in a meeting also attended by Chemical Bank. This took place in April 1992. Vlatković proposed that the entire debt be assumed by the NBY, to be allocated later between the banks covered by the agreement (this was the model used by Russia to divide the debt between former Soviet republics). I immediately rejected the proposal, and informed the government and the Governing Board accordingly.

Negotiations with the London Club were difficult; the creditors were aware of the situation in the former SFRY, in particular the foreign exchange position, and therefore under no condition wanted to accept any proposal to remove the joint and several liability clause or the cross liability clause. To help the most important banks covered by the agreement change their views, at the governors’ meetings of the BIS in Basel I also asked for help from the national bank governors in the countries where the commercial banks were based. To this end our side also engaged Fritz Leutwiler, the former Swiss central bank governor, who was asked to determine how our debt was trading on the secondary market, and in particular how active the NBY was, given that it held all the information about the debt in terms of individual entities, while having national foreign exchange reserves at its disposal. His findings were a significant help in reducing the debt related to the former federation, while we also gained information about how much of the foreign exchange reserves had been used for these purchases by the NBY.

Because the negotiations showed no signs of being resolved in 1994, while the moratorium on the repayment of principal had expired, there was a great risk of the creditors beginning to exercise repayments via the foreign currency accounts held abroad by Ljubljanska banka and Kreditna banka Maribor on the basis of the joint and several liability clause. When I discussed the situation with Tietmeyer, he reminded me of the German approach taken after the war in connection with Deutsche Bank and Dresdner Bank, which were headquartered in Berlin and Dresden respectively. Germany passed a special law to ringfence the banks, allowing them to trade in connection with their old liabilities at the two original headquarters, but transferring new business to a newly established bank with the same name headquartered in Frankfurt. This legal solution was recognised by the IMF, and before various courts. Based on this information, we worked with Hans-Dirk Krekeler, chief counsel at Deutsche Bank, who explained their solution to us in detail, with the suggestion that we do the same, leaving the old business at the existing two banks, and moving new business to a newly established bank. After running this solution by lawyers in Washington, New York, London, Paris and Frankfurt, we drafted a constitutional law to establish the new Ljubljana and Maribor banks. When this law was being passed by parliament, the session was attended by the registry judge, and the two banks were thus established ex lege. The form of a constitutional law was chosen because it prevented the establishment from being contested before the domestic constitutional court.

Once Slovenia had passed this legislation, Croatia immediately filed lawsuits against Ljubljanska banka in connection with foreign currency savings on the basis of a Croatian decree with effect of law adopted before Christmas 1991, which gave savers the right to transfer their foreign currency claims against Ljubljanska banka Zagreb to any of the domestic banks, Alas, 30 years later, and 20 years after the Vienna Convention was ratified by both countries (Slovenia in 2001, Croatia in June 2004), the problem has still not been resolved, although negotiations began back in 2001 under the terms of the Vienna Convention with the mediation of the BIS, which were not brought to a successful conclusion because of Croatia. Here I should add that a series of meetings have been held throughout this time between the two governments, and also between the two central banks. Moreover, Hans Flickenschild, the IMF mission chief for Slovenia, suggested that Slovenia draw up a solution proposal and send it to Croatia.Banka Slovenije and the Ministry of Finance drew up a concrete proposal, submitted it to Croatia and the IMF, but sadly there was no response. The group of governors with whom I was meeting on a monthly basis in Basel suggested that I hire Erik Hoffmeyer, the Danish bank governor, as a mediator. He accepted the request, studied all of the material in depth, and said that he was ready for a tripartite meeting. Even though we agreed a meeting under the aegis of the IMF in Washington, Croatia failed to attend. Later one more attempt was made, with the help of the Dutch governor, but unfortunately this too came to nothing.

Amid this unfolding of events, a new initiative for dividing the debt came from the new Serbian governor, Dragoslav Avramović, who in November 1994 invited me to a discussion in Budapest, during a conference organised by the Hungarian central bank to celebrate its 70th anniversary. The discussion was attended by Markus Lusser, the Swiss governor, and Alfons Verplaetse, the Belgian governor, and my colleague and vice-governor Marko Kranjec. The discussion raised the Serbian proposal to use the Russian debt division model, which was immediately rejected by myself and Kranjec.

In the wake of further work by a number of institutions and central banks, our efforts finally paid off in 1995, when the Dayton Accords were signed for Bosnia and Herzegovina: the two clauses were repealed, the located and unlocated debt were divided, and the path to foreign markets thus opened up for Slovenia. Slovenia assumed 18% of the debt, slightly more than the share determined on the basis of the IMF’s fundamental analysis of the economy of the former Yugoslavia, where Slovenia accounted for 16.39% of the debt with the IMF and also the corresponding capital.

I should also mention the following: the NBY held gold reserves at the BIS in Basel, and we were therefore endeavouring to prevent this gold being returned to the NBY, and for it to be held until further notice at the BIS, and then divided between all the newly created central banks. We had managed to find out the quantity of gold deposited at the BIS on 12 April 1991, when France Bučar, speaker of the Slovenian parliament, worked with Otto von Habsburg to organise a meeting with Alexandre Lamfalussy, then general manager of the BIS, which on the Slovenian side was attended by Jože Mencinger, the deputy prime minister, myself, Marko Kranjec, then finance minister. After many years of work, and help provided by German, Austrian, Belgian and Swiss bank governors, we were also successful in this endeavour: the BIS followed our proposal, and divided the several hundred million dollars’ worth of gold between the newly created central banks, bypassing the negotiations led by the Badinter Commission. When the European Monetary Institute was established on 1 January 1994 as the predecessor to the ECB, its helm was assumed by Lamfalussy, who was replaced at the BIS by Andrew Crockett, an Englishman. He started the negotiations afresh, and told us the following: the BIS was required to return the gold to the official depositor, i.e. the NBY; the NBY was claiming that the gold was from the time of the Kingdom of Serbia, and did not belong to the SFRY; Slovenia should submit a written agreement between it and NBY, as had been done by the Czech Republic and Slovakia to divide their assets according to a two-to-one formula, but we could also call for special arbitration under the BIS’s statutes, where he was continually reiterating that the former Soviet Union tried to obtain the gold of the Baltic states annexed after the Second World War, but failed to do so, the BIS returning it to the latter when they again became independent countries. An additional argument on our side was that Slovenia had become a member of the IMF on 13 January 1993, and based on considered analysis the IMF had proposed a formula for dividing the debt and assets in respect of Slovenia and all the other former Yugoslav republics.

Custody accountts

Given the official announcement of the external convertibility of the Slovenian currency in 1995 on one hand, and the beginning of pre-accession negotiations with the EU on the other, and in light of the restrictive monetary policy, more and more business was being done with foreign investors, as they pursued two things: the higher interest rates in Slovenia because of the stabilisation process, and the annual real appreciation of the tolar.Ever since the third quarter of 1992 Banka Slovenije had been faced with rising capital inflows from the rest of the world. By 1994 the net medium-term and long-term capital inflows had exceeded 4.5% of GDP, and later actually exceeded the figures seen in Asian countries during the nineties. If in these circumstances Banka Slovenije wanted to pursue the stated tolar exchange rate policy of encouraging exports on one hand, while reducing inflation on the other where the exchange rate is the first price, it would have to intervene on the market via sterilisation, which would entail it buying capital surpluses of this type by issuing new money. To curb inflation it would issue treasury bills at a competitive interest rate to effectively balance the quantity of money in circulation, thereby continuing the stabilisation process.

By the beginning of 1995, when the currency risk premium was still high, Banka Slovenije’s sterilised foreign exchange intervention had successfully neutralised the appreciation of the exchange rate driven by the extensive financial inflows, and the costs of intervening were low during this period. After the first half of 1995, the currency risk premium fell sharply, which reduced the effectiveness of the sterilisation. In these circumstances Banka Slovenije introduced two measures: to engage foreign financial loans from banks, a tolar deposit was introduced, which significantly changed the opportunity costs of these transactions (an asymmetric Tobin tax), and off-balance-sheet custody accounts were introduced, and were classed as net borrowing in the rest of the world.

These two measures were put in place for two reasons. The Asian tiger crisis had occurred (Thailand, Singapore, Malaysia and the Philippines), as a result of large capital inflows, followed by enormous outflows. Thailand for example had put in place a measure whereby foreign investors in the Thai capital market, after selling their securities, were required to hold the countervalue in Thai currency (the baht) for a year, before only then being allowed to convert the sum into the foreign currency of their choice. During this time there was a large devaluation of the local currency, and non-residents lost huge sums. The custody accounts in Slovenia required banks who had converted foreign inflows into tolars to hold the foreign currency amount in the custody account, and to use it at the moment when the foreign investors would decide to reconvert the sum into the chosen foreign currency for transfer abroad. This eliminated the risk of a shortage of foreign currency at such moments. Initially there was a very negative reaction to the Banka Slovenije measure on the Ljubljana Stock Exchange, but when it was properly explained to non-residents, it proved to be the correct decision.To illustrate, I should also mention that in 1997 the monetisation of foreign capital inflow increased broad money by 140 billion tolars, while the costs of foreign exchange intervention increased markedly. The central bank’s stock of tolar securities increased fourfold in 1997 alone, and had exceeded 50% of primary money by the end of the year.

The sterilised foreign exchange intervention prevented excessive financial inflows from the rest of the world until 1998. Because money was exogenously determined, the growth in tolar lending (the money supply) in the period after 1993 was generally dependent on the effectiveness of the sterilised foreign exchange intervention. The more effective the sterilisation was, the smaller was the appreciation of the exchange rate, and the smaller the financial inflow from the rest of the world, and the larger the growth in tolar lending could be, all other business conditions being equal.

In these circumstances there was often debate about the introduction of a fixed exchange rate for the tolar, but Banka Slovenije insisted that for a credible fixed exchange rate, interest rates and inflation would have to be of the same magnitude as in the economies whose currencies the tolar would be tied to, and a balance would have to be maintained in the current account. Therefore only by directly restricting financial flows could any deviation from the aforementioned presumptions for the sustained fixing of the exchange rate be compensated for.

I should add that certain banks actually acted contrary to the Banka Slovenije measures, but in all these instances strict financial sanctions were imposed (including fines of up to DM 2 million), and licences were withdrawn from their directors.

Russian default of August 1998, and impact on foreign markets

The great expectations of the financial markets and those of the European public in connection with the advent of the euro were unexpectedly shaken by the Russian financial crisis.

Once the Asian financial crisis had abated, new problems arose on global markets, which were reflected in part in major falls in commodity prices, oil in particular. Oil prices fell to just 9 dollars a barrel. As an exporter of commodities rather than final products, Russia was hit particularly hard by this, which resulted in a debt default. This shook the global markets badly, particularly those foreign investors who had invested in the Russian economy. Fear led to flight by foreign investors, particularly from former Comecon countries; to illustrate, 1.5 billion dollars was repatriated from neighbouring Hungary in a month.

Major changes also occurred on certain foreign exchange markets, particularly those of small and medium-size countries. One high-profile case was Denmark, which suffered an attack on the krone, and the central bank lost large amounts of foreign exchange defending the exchange rate. In this situation it was saved by the newly established ECB, having joined the ERM II. It is still in this position today, and holds an opt-out in respect of the euro, the euro having been rejected by a majority in past referendums.

In those circumstances, and given the criticism that the IMF had faced during the Asian financial crisis that despite various analysis and controls it was not doing enough to protect foreign investments, the IMF offered Banka Slovenije a special instrument, a credit contingency line in the amount of 500 million dollars, which was to be used in the event of speculative attacks on the tolar. When asked how such transactions should be identified on the market, the IMF replied that Slovenia would have to judge for itself. When I informed the governors at the BIS of this offer, the majority judged it to be highly risky, with some saying that it could even encourage foreign and domestic savers to transfer money out of domestic banks. Following lengthy discussions, the Governing Board also backed the majority opinion at the BIS, but thanked the IMF for the willingness and confidence that it had shown.

The risk remained, and its dimensions were difficult to measure. We were always aware that the trust of the public in Slovenia was most important, and something that we could not afford to lose. The Foreign Exchange Act stipulated that if the national foreign exchange reserves were to decline by more than 10% in one week, the government and Banka Slovenije would have the right to put foreign exchange controls in place, a scenario that was familiar in Yugoslav times. After long discussions and analysis, we came to a proposal whereby we would ask five foreign banks if they were willing to reach a gentlemen’s agreement consisting on their side of a commitment that in the event of an attack on a domestic bank related to foreign currency saving, they would assist us with a credit line to ensure that the savers’ contractual commitments were correctly met, and that there would thus be no need for any restrictions. All five banks were willing to enter into an agreement of this type, which also required the payment of a minimal standby fee. In the end we signed contracts with three banks, and did not inform the domestic market of this partnership. I can say that it never came to any panic on the market that might have triggered the flight of foreign currency savings, thereby activating the contractual relationship.

Reform of payment systems

As I mentioned in the introduction, Yugoslavia had a sui generis payments system where the commercial banks held accounts at the SDK, as did legal entities. Citizens held dinar and, later, tolar currency accounts at the commercial banks, and also foreign currency accounts. Legal entities held foreign currency accounts at commercial banks, or exceptionally held accounts directly abroad (investment work in the rest of the world). The commercial banks held foreign currency accounts at foreign banks, in the countries where the currency in question was legal tender.

Given that the SDK was a sort of national controller and guardian of national assets, any discussion of reform of the payments system landed on major problems and a lack of trust, with suggestions that we would lose control and oversight of payment transactions. By contrast it was clear to Banka Slovenije from the very outset that banks would have to hold accounts with it, as only the central bank can create money ex nihilo, no-one else. It also happened in Slovenia that one day the SDK allowed one of the banks to go overdrawn in its account, which de facto entailed the creation of new money bypassing the central bank. The excuse given by the SDK was that otherwise not all pensioners would have received their pensions.Banka Slovenije of course issued strong condemnation of this unlawful act, which gave rise to fundamental debate on the monetary policy committee. This debate opened the eyes of many to understanding the concept of money creation, and the monopoly held by the central bank in this area.

The next problem was information coming unofficially from the SDK about the liquidity of individual banks, which was particularly sensitive when Banka Triglav went bankrupt in 1996. In this case too Banka Slovenije had to use all of its authority and arguments to make clear the damage and dangers of information of this type. These events and certain others helped add to the understanding of the role of one institution and the other, and to the final decision to move the commercial banks’ accounts to Banka Slovenije, and the accounts of businesses to the commercial banks.

This development also entailed a major logistical and technical problem, and a new IT approach. For the latter, Banka Slovenije engaged Logico, an Irish firm that at that time was already working with the European Monetary Institute, the predecessor of the ECB, and also the Irish central bank. The entire reform was successfully realised in 1997, to the satisfaction of Banka Slovenije and the majority of market participants.

Cooperation between Banka Slovenije and the government and parliament

Positive legislation made the government and Banka Slovenije independent institutions, but simultaneously answerable to the National Assembly. The monetary policy committee held numerous sessions at which it discussed monetary policy measures, was briefed on them, and posed a series of questions, and its representatives were invited to attend meetings of the Governing Board. For eight years the National Assembly invited the governor when adopting the state budget to provide Banka Slovenije’s opinion from a monetary policy perspective during the opening of the debate on the budget proposal. As far as the government was concerned, the cooperation between Banka Slovenije and the Ministry of Finance was very good, and aimed to identify optimal solutions in the given situation. The minister attended meetings of the Governing Board on a more or less regular basis, and had the right to participate in the discussion, but not to vote.

Informal meetings were also frequently held between the prime minister and the governor. These meetings allowed for an exchange of views, and briefings by both sides, all with the aim of monetary policy and budget policy producing the best possible results, from the perspective of stabilisation and from the perspective of economic growth and general progress.

A difference of outlook arose between the government and Banka Slovenije in the approach to addressing housing issues, and in the adoption of the housing scheme in 1999. The essence of the scheme was that the government would encourage monthly saving for housing purposes, with individuals deciding how much to save according to their financial capacity. Savers were required to contribute for at least five years, and after five years were eligible to apply for a housing loan under more favourable terms, which were even more favourable after ten years of saving. The majority of commercial banks also embraced this approach, and gave a commitment to grant more favourable terms for housing loans made to savers of this type. At the same time the saver had the right to terminate the saving at any moment, and to request the payout of the savings. This right of course posed a risk to the bank, i.e. similar liquidity risk to sight deposits. Banka Slovenije specifically warned the government about this arrangement, and that it did not have the right to mandate that such funds be handled without a reserve requirement, as was the case with long-term deposits, and also that the instrument of the reserve requirement was exclusively a competence of the central bank, and not the government. Unfortunately the government did not change its decision, which resulted in Banka Slovenije testing the arrangements before the Constitutional Court, which found in favour of Banka Slovenije. From this moment forward the National Assembly no longer invited me to the sessions in which the state budget for the following year was presented, and despite the practice established for many years I no longer had the chance to give my opinion of the content of the budget proposal in front of parliament.

Slovenia introduced VAT in July 1999, but it had already had major consequences on developments in the monetary field. Before the introduction of VAT, growth in lending to the non-banking sector in Slovenia was moderate, at between 6% and 8% per year, but it rose sharply in the lead-up to the introduction of VAT, particularly in the household segment, as consumers began to borrow to purchase durables, most notably cars, usually over the medium term, i.e. five years. The impact of VAT on price developments was clear: the 20% tax rate had an impact on all prices, raising annual inflation to between 7% and 9%, before it again fell to below 4% in 2001. In light of the above it is evident that the loans of this maturity were repaid in spring 2004, before Slovenia joined the EU, which brought new credit growth together with the opportunity offered by the housing scheme. Throughout this period there was never an even larger surge in lending, thanks to the restrictive monetary policy with higher interest rates than in the countries of western Europe, and the privatisation process, which had an impact on firms’ investment activity, which was merely symbolic during the ownership transformation.

Slovenia joined the EU on 1 May 2004, and later that year 23,000 savers arrived on the market having completed their minimum of five years of saving under the housing saving scheme, with the intention of obtaining loans to purchase housing, or investing in real estate.

Conclusions

The declaration of an independent Slovenian state was a great historical act that faced a number of unresolved questions and risks, some in the monetary field.From the very outset Banka Slovenije was aware that establishing monetary stability would be a long and difficult process, which could only succeed with the broadest possible support from a majority of market participants.When it comes to money, unsettling news is enough to spread fear and panic, while confidence requires concrete acts tied to promises, and the time to keep them. In this field Banka Slovenije really made the most important contribution to our shared prosperity. The public’s confidence in the new Slovenian currency grew with every year, and the tolar became a store of value, while its exchange rate against foreign currencies, as the first price domestically, helped the Slovenian economy’s performance on foreign markets, which also pointed to the success of domestic businesses in going up against foreign competitors. These facts were confirmed by public polling, which showed that the tolar and the central bank enjoyed some of the highest levels of trust as institutions in Slovenia. All of this entailed great recognition for Banka Slovenije, and confirmation that its monetary policy was successful and worthy of trust.

Amid all these developments, and finding solutions to a series of problems, our thanks should go first to the members of the Governing Board, and to all other staff at Banka Slovenije, whose expertise, values and diligence helped to make the entire process of transitioning from the old socialist model to a new market system so successful in the sense of European stability and its terms of trade. The development of the independent state proceeded in parallel with the creation of the European Monetary Union, whose legal basis is the Maastricht Treaty, which was signed in February 1992.The opening of pre-accession negotiations with the EU, and the close collaboration with international institutions and central banks, in particular their practical experience in the monetary field, made a major contribution to the implementation of monetary policy in daily practice, and to a better understanding on the part of people.

Something else that should be remembered: human issues and weaknesses, sometimes in connection with an insufficient degree of caution, and other times in connection with the quest to benefit oneself over the common good, with an awareness that any information coming from the central bank can entail material rewards or losses, led us to adopt a code of ethics, following two years of discussion. This was made even more important by being signed by members of the Governing Board, even though they were not officially employed by the bank. It was the code of ethics that gave human capital, the most important form of capital at all institutions, even greater value, meaning and responsibility.

Finally we should not overlook the Governing Board resolution that set up the Commission for Research Work. Each year it awarded scholarships for studying economics, business and law at undergraduate level, and scholarships for postgraduate studies inside and outside Slovenia. On the day marking the anniversary of the issuance of the first Slovenian money, Banka Slovenije awarded prizes and accolades for the best dissertations, based on proposals drawn up by the aforementioned commission. A number of the prizewinners found their first jobs at Banka Slovenije, thus adding to the theoretical knowledge of the entire collective, and began working at home and abroad to obtain practical experience in the monetary field and across banking and finance.

And to finish I should mention the prize of DM 10,000 awarded to me on 19 December 1994 by the Wirtschaftspolitischer Club Bonn in recognition of monetary policy achievements, which I donated in full to the children’s ward at Ljubljana’s University Medical Centre, and the honorary gold medal of freedom awarded to me by the president on 22 June 2001 for outstanding service in the creation and implementation of the Slovenian monetary system during Slovenia’s independence process, which I take to be recognition for all those with whom I collaborated and worked to achieve the goals we set. Once again, thank you for your trust and your partnership.