The bankruptcy of a Catholic diocese that diversified into business reflects scant supervision

Father Joze Golovsek is praying for a bailout. But if it comes to the worst and the banks seize his church, he can take solace from knowing they cannot asset-strip the angels.

“It is protected as a cultural heritage,” says the priest, wistfully looking up at the pastel pink and yellow hues of the handsome baroque building in Maribor, Slovenia’s second city. “Any new owner wouldn’t be allowed to resell the relics inside. They can’t dismantle the altar and remove the panorama of holy St Aloysius, or take away the angels.”

This 18th century house of God is at risk of repossession not because of the prohibitive cost of repairs but as a result of the commercial misadventures of its clergy. The Archdiocese of Maribor is bankrupt, unable to pay its debts and at the mercy of its creditors. Father Golovsek’s church may pay the price.

The Roman Catholic Church is no stranger to financial troubles. Yet by sheer size, the collapse of Maribor diocese and its associated investment funds – Zvon Ena and Zvon Dva (Bell One and Bell Two) – is one of the biggest to blight the modern Church. Total claims have reached up to €1bn – all that for a small city of 114,000 souls nestled in the lush foothills of the Pohorje mountains.

The events that put St Aloysius into receivership and rocked Slovenia involve unchecked entrepreneurial spirits, arms-length financing, soft porn, a runaway bubble and suspected demonic possession. Already three bishops have resigned and a priest turned financial wizard is facing jail.

For Slovenia, it is a painful reminder of – and a contributor to – the go-go years of the past that have left its economy today on the brink of a eurozone bailout. For the Vatican, now under a Pontiff battling the “idolatry of money”, it is a stark lesson in the perils of hands-off management.

The Church in Slovenia is still reeling. “These events are the fruits of ploys by mysterious evil forces,” said Monsignor Andrej Glavan, president of the Slovenian Bishops’ Conference, last year. “Rationally it is difficult to grasp and understand.”

St Aloysius’s problems stem from being pledged as collateral, along with the bishop’s seat in Maribor’s main square, assorted vineyards, an organ workshop and a disused monastery. These scant assets underpinned an epic financial folly, a sprawling enterprise funded in part by priests urging their flock to entrust the Church with the privatisation certificates they received after Slovenia broke from Yugoslavia and threw off communism. Some 60,000 heeded their call.

Through the two Zvon funds, the diocese stood astride an investment empire spanning publishing, paint manufacturing, glassworks, water parks, telecommunications, Croatian property and a slaughterhouse in Buenos Aires. Paper gains in an overheated stock market secured loans to expand further. When the boom collapsed, so did most investment funds. The Zvons stood out because of their Church ties: this was not a religious institution struggling to manage inherited wealth but a ruinous attempt at building a fortune from scratch.

The final tally from the failure is hard to pin down. Although total claims lodged in the bankruptcy process exceed €1bn, a more accurate figure is perhaps roughly €500m in net loans from banks. By comparison, the Holy See’s annual administration budget is about €250m. It is a remarkable sum given, under Vatican rules, any loans in excess of €1m require Rome’s approval.

Blame for the calamity is heaped on Mirko Krasovec, a canny priest who acted as Maribor’s treasurer for almost a quarter of a century. As the bankruptcy hit in 2011, Krasovec was banished to an Austrian monastery and last month sentenced to two years in jail for a role in embezzling EU grants – a guilty verdict against which he is appealing. While admitting mistakes, he insists he is no more than a scapegoat. His critics are less generous. Anton Guzej, a banker with whom he formerly worked, said: “He always behaved like a baron. His methods were those of Slovenian tycoons.” Krasovec declined to comment.

It is an unlikely fate for a man born to a modest farming family in which four out of five brothers entered the priesthood. He showed an enterprising spirit from a young age, whether making his own shoes or pianos. He was trained in theology, not economics, but impressed as a parish priest when managing a renovation project. In 1985 he took over as treasurer, shepherding Maribor through a critical transition.

The demise of Tito’s Yugoslavia was the Church’s opportunity to reclaim what it had lost. Communist partisans saw the bishops as the enemy within, a permanent threat, tarred with collaborating with fascists during the second world war. Once a state within a state – with football clubs, schools and hospitals – the Church was left with almost nothing. Persecution was relentless. In 1953 Anton Vovk, Ljubljana’s archbishop, was doused in petrol and set alight in the street. The wounds inflicted on Slovenian society are still raw.

As Slovenia seceded in 1991, Krasovec’s sharp instincts proved invaluable. He built connections overseas and opened Krekova, a successful savings bank, which was bought by Austria’s Raiffeisenbank for about €30m in 2002. Relative to Ljubljana, its episcopal big brother, Maribor fared poorly from the restitution of property. Jealousy was rife; Krasovec was the priest with the nous to close that gap. Clerics recall his predecessor saying: “As an old-style treasurer I dealt with the money I had. My successor is dealing with the money he thinks he will have some day.”

A pivotal decision was to collect certificates granted to Slovenes during mass privatisation, which had a notional value of €1,500-€3,000. Priests throughout Slovenia were enlisted to help. St Stanislaus Institute, Slovenia’s top Catholic education institute, claimed that investing with the Church “out of love” would bring “inner joy, now and in eternity”. “God who sees in secret will reward you,” it said.

In the early days, Maribor fared well. While most certificates were badly invested, it oversaw a blue-chip fund that soared as Slovenia moved into the eurozone in 2004. The main market index jumped 500 per cent between 2003 and 2007 – a rise that was eventually wiped out. Simon Zdolsek, the former head of Zvon Ena, said: “We all made a mistake – Zvon and the banks and the Church – because we believed in this boom.”

Krasovec, in an interview with the Delo newspaper before his banishment, said: “It is like you have sown wheat and then the crop is destroyed by hail and at the same time the barn is burnt. Had anyone warned us this would happen, we would never have done it.”

Like many investment funds, the Zvons borrowed too much. Certain decisions made the fallout worse for the bishops. One was to take a controlling stake in the Zvons in 2005 via a vehicle named Gospodarstvo Rast. Legally, there was a distinction but the Zvons were bound to the Church. Another problem was failing to prevent Zvon’s management from straying into more speculative investments. And then there was T2.

It was pornography, in the end, that alerted the Vatican. In late 2007, T2, a company controlled by Zvon Ena, sought to muscle in on the Slovenian television market with a 120-channel package – including several adult offerings. One banker joked that it offered the “finest pornography in Slovenia”. But for the archbishop of Maribor, this was no laughing matter. The morality of its investments was being debated in public.

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There are conflicting accounts of whether Pope Benedict raised the matter directly. But in 2008 when Slovenia’s bishops visited Rome, the message was clear: the porn and financial escapades must stop. The Pontiff preached to the assembled Slovenian bishops in their black cassocks and purple cincture bands on “greater fidelity to the Gospel in the administration of Church property”.

Over time it became apparent that T2’s soft porn was one of its more astute commercial decisions. Its big misjudgment was attempting to build its own telecoms infrastructure across Slovenia – an unfinished and ultimately ruinous goal. The market turned when the project was at its most vulnerable; banks took fright. It was Zvon’s biggest asset and the key to the downfall.

While the Vatican’s suspicions of Maribor were raised in 2008, it took three years for the Holy See to take charge, eventually calling in NM Rothschild, its advisers, ordering an inquiry and ousting three bishops. Even now in Slovenia there is open criticism of Pope Francis for last summer pushing out Monsignor Anton Stres, a popular cleric who became archbishop of Ljubljana after serving in Maribor.

Krasovec argues that he was given strategic direction by the bishops he served. They approved the strategy and backed the crucial decisions, he claims. The problem was the leap into the capitalist markets, not the execution.

In a 30-page letter to clergy leaked to the newspaper Dnevnik by a source other than its author, Krasovec said he “accepted the role of scapegoat”. “But the twisting of the truth goes too far . . . this unjustified blackening of my name will not let the Church save face”.

Aftershocks continue. More prosecutions are possible. Alenka Bratusek, Slovenia’s centre-left prime minister, said the scandal was “amazing”. “We are conducting forensic searches now in our banks so that those that did on purpose commit any wrongs will be brought before the judges.”

Creditors are expecting back only a fraction of their claims. Debate is raging within the Church over compensation for faithful investors. Bogdan Knavs, a Franciscan friar born in Maribor, openly argued regret alone would not absolve the sin of recklessly squandering “savings of small people”. “If this injustice is not settled . . . the stain will blight the Church for decades,” he wrote.

The bishops are standing firm. In their eyes the responsibility is limited: other dioceses are not answerable for Maribor’s errors; Maribor was legally separate from the investment companies; and investors were given several opportunities to cash out. Msgr Glavan said the compensation demands were “unreasonable” given that the Maribor archdiocese “completely depends on its beggar’s stick”.

A neighbouring Austrian diocese may yet intervene to save St Aloysius, and perhaps the bishop’s seat. The Church is painfully aware of the reputational hit it has suffered; a few yards from St Aloysius church are walls daubed with names of church leaders and swastikas. The resentment runs deep.

“I learnt something about the church,” said Zoran Zeljic, a psychologist who invested late in Zvon. “At every mass there is confession, recognition of sin. It is ritual, they say it but they don’t mean it, life goes on as before. They are hiding, hiding from moral responsibility, hiding behind legal structures, hiding from what they owe.”

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Church and society: The threat of the satanic red dragon

The ruin of the Maribor archdiocese is a parable for Slovenia as it struggles with the hangover of a runaway boom and the unhealed divisions of history. The country of just 2m people, squeezed between the Adriatic and the Alps, faces its biggest crisis since independence as the bills from a decade of excess and political negligence come due.

Once feted as the great success of post-communist transition, Slovenia has been brought low by corporate cronyism, lax lending and a state that still looms large over the economy.

The clerics of Maribor were far from alone in being swept along in an unsustainable bubble. But their downfall has bitterly divided a society still grappling with the legacy of the second world war and 50 years of communism.

“The red dragon relentlessly attacks,” said Monsignor Andrej Glavan, the Bishop of Novo Mesto, evoking the seven-headed beast of the Book of Revelations. “Satan exploits the weaknesses and failures of one of the six dioceses . . . to mount an attack on the entire Church in Slovenia.”

Ivan Stuhec, a prominent theologian, said: “My opinion remains that the Zvons could have been saved. If we could have saved the Zvons we could have saved Rast [the Church holding company] and with that we would have saved the archdiocese.”

The Zvons were in better shape than other Slovenian funds that collapsed. Companies it backed are still prospering. But Slovenian stocks fell 40 per cent after the Zvons declared bankruptcy. Any white knight for Maribor needed deep pockets.

People involved in the final days say a Vatican-brokered loan was close – even provisionally accepted – before it was scuppered by a mysterious intervention. Banks later demanded collateral from other dioceses, leaving some suspecting a plot against the entire Church.

Mr Stuhec has previously denounced lobbies attempting to “behead” the Church. “I don’t think the trap was set for us,” he said. “The people within the Church strayed so far that they could be captured. And when they were already in the trap it was of course exploited by opponents of the Church.”

Additional reporting: Urban Cervek and Caroline Bauman