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Who will be the next Cyprus?

Europe’s whack-a-mole approach to crisis management has left more countries vulnerable.

BRUSSELS, Belgium — Ever since they broke away from Yugoslavia in 1991, Slovenes have liked to present their country as a sober, Swiss-like Alpine land, nothing like their hot-tempered Balkan and Mediterranean neighbors.

So the wave of speculation that Slovenia is poised to follow Cyprus as the next victim of the euro zone crisis sweeping southern Europe has left them mortified.

“People here are very worried,” says Tanja Fajon, a Slovene member of the European Parliament. “If I look back over the 20 years since independence, the negative atmosphere has never been so bad.”

Slovenia isn’t the only nation worried about contagion from Cyprus. Fears that savers in other countries could follow Cypriots in seeing their bank accounts frozen, access to funds restricted and deposits raided to help bail out banks are spreading across the euro zone and beyond.

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“We are not Cyprus” has become a rallying cry for officials from Luxembourg to Latvia, Malta to Israel as governments seek to distance themselves from the Mediterranean island’s mess.

The main fear is an outbreak of depositor panic leading to a run on the banks. That would be bad enough if only small countries with oversized financial sectors were in the line of fire.

But market watchers are also increasingly nervous about Italy, the euro zone’s third-largest economy. Mired deep in recession, the country shows no sign its squabbling politicians can form a government, let alone plot a path to recovery.

Zsolt Darvas, an economist at the Brussels think-tank Bruegel, calls Italy the elephant in the room.

“Markets have been very benign on the political stalemate,” he says. “If investors lose their trust that there will be a strong government capable of keeping the fiscal house in order and implementing reforms that would restart growth in Italy, a capital out-flight could start and then accelerate.”

For the moment, however, Slovenia appears to be the most-likely target of market jitters.

The mountainous country of 2 million was once a European success story. After joining the European Union in 2004, it raced ahead with growth rates over 5 percent. Its citizens enjoyed income levels higher than in some older EU members to the west and in 2007, it became the first former communist country allowed into the euro zone.

The following year, the global financial crisis knocked it off track.

The economy contracted 7.8 percent in 2008, slipped into a double-dip recession last year with a further fall of 2.3 percent, and there’s little improvement forecast for this year.

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Banks sucked into risky deals during the boom years are now saddled with $9 billion in bad debt.

The International Monetary Fund estimates the government will need to raise around $3.8 billion this year, mostly on international markets at a time when investor concerns have pushed borrowing costs to record levels.

Yields on its benchmark 10-year bonds topped 6.3 percent last week, edging toward the 7 percent level that forced Greece, Portugal and Ireland to seek international bailouts.

There’s some hope, however. Despite the grim news, economists point out that Slovenia’s problems don’t come close to the Cypriot morass.

“Looking at the size of the Slovenian banking sector and the size of a potential bailout package for Slovenia, we do not find the comparison with Cyprus to be appropriate,” says Jaromir Sindel, a specialist on the country at Citibank.

Slovenia’s bank assets represent 140 percent of economic output, compared to 700 percent in Cyprus. The economy is also less dependent on the financial sector and wasn’t exposed to the toxic Greek investments on which Cypriot banks were forced to swallow large losses. The national debt stands at 59.5 percent, well below Cyprus’s 93.1 percent.

If the Slovene government that came to power last month is able to implement planned banking sector reforms, economists say, it should be able to avoid a bailout — provided already spooked international markets don’t make its borrowing costs untenable.

However, Fajon, the European lawmaker, warns perceptions are making matters worse.

“We still believe we can make it through this crisis on our own,” he said in a telephone interview from the Slovene capital Ljubljana. “But this media spinning is very dangerous. All these headlines warning that Slovenia will be the next one are extremely negative for us.”

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Contagion fears have also been raised about Malta and Luxembourg, the two euro zone countries in which banking plays an even bigger role than it does in Cyprus. Luxembourg, the EU’s richest state, looks to be in the clear for now. Its banks are profitable and their share of non-performing loans is close to zero.

“There are no parallels between Cyprus and Luxembourg and we do not allow such parallels to be imposed upon us,” Prime Minister Jean-Claude Juncker said recently.

Malta, like Cyprus, has grown quickly as a Mediterranean island banking sector. But officials there point out that the financial center’s structure — a few strong domestic banks operating separately from internationally funded lenders — helps minimize risk. Nor does Malta share the Cypriot exposure to Greece or other bailed-out euro members.

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According to the economist Darvos, the country most likely to follow Cyprus as the euro zone’s main threat is… Cyprus.

He fears the lifting of restrictions on currency withdrawals imposed at the end of March could prompt capital flight that would send the economy into a nosedive. That could make the island unable to meet the terms of its $13 billion bailout from the EU and IMF.

“The Cyprus saga has not yet ended,” he says. “There’s still a major risk.”