ECON MINISTER TALKS ABOUT FINANCIAL CRISIS, U.S.

1. (C) CDA discussed with Slovenian Minister of Economy Matej
Lahovnik on March 11 the Global Economic Crisis, Slovenia's
economic position, and opportunities for U.S. investments in
Slovenia. CDA urged Slovenia, as part of the EU, to address
the financial vulnerabilities in Central and Eastern Europe
(Ref C). CDA reiterated that the U.S. is committed to
working with our international partners to address the
financial shocks faced by countries requiring assistance.
Lahovnik talked about Slovenia's dependence on its export
markets, calling the situation in foreign markets
"devastating" due to the global economic crisis. He
expressed concern that liquidity could become a problem in
Slovenia as soon as May or June if banks do not start lending
again. He stressed the desire of the Slovenian Government to
diversify energy sources and routes, and invited U.S.
companies to invest in Slovenia - especially if they can help
Slovenia meet the goal of diversifying energy. He admitted
that Slovenia would likely fail in its effort to gain 51
percent ownership of the Slovenian portion of the proposed
South Stream gas pipeline. It would likely settle for a 50%
share, but would wait to sign until after a feasibility study
is completed before signing. He stated that Slovenia would
scrupulously observe EU rules regarding transparency and
competitiveness in its dealings with Gazprom. End summary.

Energy


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2. (C) Lahovnik agreed that, although Slovenia weathered the
January gas crisis well, it must ensure diversity of sources
and routes. According to Lahovnik, "What arms were in the
past, energy is in the future." He commented that Slovenia
is taking a conservative approach to South Stream. He stated
that both sides needed to resolve many open issues, and that
a feasibility study should be done before Slovenia signs
anything. While still publicly maintaining the position that
Slovenia will not sign on for less than 51%, Lahovnik
admitted that it will probably settle for 50%, but will
insist that Slovenia gets to appoint the project General
Manager. Lahovnik noted that the state will maintain
ownership of Slovenia,s share, because dubious private
investors could give Russia de facto majority control. He
answered CDA that any deal that is signed with Gazprom would
strictly follow EU rules on, for example, transparency and
competitiveness. He said it is important that the EU speak
with one voice, and Slovenia will not break ranks. He
believes that Hungary, Bulgaria and Greece were too hasty in
signing, and the European Commission could act against them
because of it.



3. (SBU) CDA pushed Lahovnik to consider U.S. companies to
invest in Slovenian power, suggesting U.S. companies that
have expressed interest in Slovenia's coal, nuclear and
natural gas industries. Lahovnik was especially interested
in bringing GE Energy together with an aging power plant in
Trbovlje. Trbovlje is rapidly running out of capacity to
efficiently generate electricity from coal, but proximity to
Ljubljana makes it desirable to maintain if an outside
investor can figure out how to update the facility. (Note:
Post arranged a meeting between GE Energy and Trbovlje in
September 2008, and continues to contact both GE Energy and
Trbovlje to follow-up. End Note.) Lahovnik also confirmed
that a second unit will be constructed at the existing
nuclear plant in Krsko in the uncertain future. Westinghouse
will almost certainly be invited to bid on the project, but
Lahovnik did not indicate when it would move forward.



4. (C) The Minister said that Slovenia is very interested in
Nabucco, but has qualms. He expressed doubts that it would
be able to tap sufficient sources due to restrictions on
trade with Iran, and Russian influence over the Caspian Basin
countries. He stated: "Nabucco is just wishful thinking for
now." He discussed Liquefied Natural Gas (LNG), wistfully
saying that it would have been the best, most eco-friendly
way to diversify. He conceded, however, that it will not
happen in Slovenia because the government would be unable to
overcome the strong local opposition to installing LNG
terminals on the coast.

Liquidity could run out by May


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5. (C) Slovenia is hurt by the global recession, but Lahovnik
was matter-of-fact about the economic future. He explained
that 70 percent of Slovenia,s GDP derives from exports, so
Slovenia,s prosperity is directly tied to the prosperity of
its European trading partners. Lahovnik said global economic
recovery depends on the quick recovery of the U.S. economy,
but in his opinion it will take time for the measures passed
by the Obama administration to have an impact. He claimed
the markets are not realistic, expecting too much, too soon
from the U.S. stimulus packages. Instead, the world should
look to improvements in 2010. Acknowledging that confidence
was an issue, he echoed the words of Minister of Finance
Krizanic (ref A): "Everyone is overreacting to the situation."



6. (C) Lahovnik reviewed Slovenian measures to counter the
financial crisis, mentioning two packages the Government has
adopted with the goal of keeping Slovenia competitive on the
global market. Lahovnik asserted that the conservative
approach of Slovenia,s state-owned banks "proved to be the
right thing." In the years leading up to the crisis,
Slovenian banks avoided sub-prime lending, credit default
swaps and other risky financial offerings that had gotten
other countries' banks into such trouble. He views the EU
plan as a toolbox, and Slovenia should only use the tools
that are most appropriate for Slovenia. He said the three
most important "tools" for Slovenia are: 1) reducing taxes on
the labor force, 2) subsidizing reduced work hours, and 3)
increasing investment in research and development. He
pointed out that the third tool is designed to keep Slovenia
competitive in the long-term. He noted that Slovenia's
ability to fund these projects is restricted by Maastricht
criteria (the budget deficit limit of three percent of GDP).
He left the door open to possibly increasing the budget
deficit to fund projects should the crisis deepen.



7. (C) Lahovnik said that due to the "devastating situation
in foreign markets," banks are reluctant to lend. As a
result, liquidity could become a problem in Slovenia as soon
as May or June. Lahovnik reiterated that Slovenian banks are
strong and have no toxic assets; the problem is in lack of
confidence, even in interbank lending. Although most of
Slovenia,s trade is with Western Europe, Russia - especially
the greater Moscow region - is also an important trading
partner. Lahovnik he is even more concerned about a possible
devaluation of the ruble that would reduce demand for
Slovenian goods. He also emphasized concern about the
liquidity situation in Croatia (27% of Slovenian FDI is in
Croatia.)



8. (U) Another concern for Slovenia is the auto industry.
Cars and car parts make up Slovenia's biggest exports, and
the 90 companies in the industry employ roughly 13,000
people. Lahovnik noted that Slovenia is anxiously watching
the special meeting in Brussels about how to deal with
General Motors and it's affiliates. The largest automotive
company in Slovenia is Revoz, which sells cars exclusively to
Renault; Lahovnik stated that Renault is still doing fine,
which is good for Slovenia.

Comment


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9. (C) Lahovnik, like other senior government officials
dealing with the Global Economic Crisis, starts with the
position that "Slovenia is a small and open economy," and
thus is both anti-protectionist and limited in its choice of
tools. He claims to be a strong proponent of foreign direct
investment, albeit with a bias toward greenfield investments.
Lahovnik explained with pride that he personally fought to
bring in Renault when he was Minister of Economy for just six
months in 2004. According to Lahovnik, he battled former
Prime Minister Janez Jansa, who argued against large-scale
foreign investments. The Minister of Economics boasted that
Renault is now the biggest manufacturer in Slovenia. He
agreed to meet with new U.S. companies interested in
investing in Slovenia, and requested that EmbOffs also meet
again with the Director General of the Energy Directorate
(who reports directly to Lahovnik).


FREDEN