UPDATE 2-Slovenia to get new PM to stem dramatic decline

Wed Feb 27, 2013 2:35pm EST

* Next PM says austerity "medieval medicine"

* Jansa's majority cut after walkout over property scandal

* Slovenia facing protests over unemployment, austerity

* Bailout unpalatable for euro zone, would force more cuts (Updates with Bratusek)

By Zoran Radosavljevic

LJUBLJANA, Feb 27 (Reuters) - Slovenia was set to usher in a new government on Wednesday to tackle a dramatic decline that has transformed the tiny Alpine country from post-communist rising star to the euro zone's latest bailout candidate.

With unemployment at a 14-year high and the banking sector strangled by bad loans, parliament was set to pass a "constructive no-confidence motion" to oust conservative Prime Minister Janez Jansa and hand financial expert Alenka Bratusek a one-year mandate to pull the ex-Yugoslav republic back from the brink.

If she succeeds in forming a government, Bratusek, the 42-year-old leader of the center-left Positive Slovenia party, will become Slovenia's first female prime minister, taking the reins at the height of its worst crisis in 22 years of independence.

Addressing parliament in a debate before a vote due later in the say, she came out strongly against more austerity, quoting Nobel economics laureate Joseph Stiglitz in likening it to "mediaeval medicine."

"You draw blood and, if the patient does not get better, you draw some more," Bratusek said.

"Our priority is growth and employment, which creates wealth for everyone ... I state clearly - there will be no Greek scenario in Slovenia."

When the country of 2 million people joined the European Union in 2004, it seen as a trailblazer for the rest of the former Yugoslavia and Eastern Europe. When it joined the currency union in 2007, it had the fastest-growing economy in the euro zone.

BAD ECONOMY, BAD LOANS

But the downturn in Europe ravaged its vital export market, while 7 billion euros ($9.15 billion) in bad loans exposed a toxic mixing of politics and finance of the kind that has bedeviled banks across the continent. Its 35-billion-euro economy is estimated to have shrunk 2 percent last year and unemployment is more than 12 percent.

Spending cuts and allegations of government corruption have fueled street protests of a kind not seen since Slovenia split from federal Yugoslavia in 1991, avoiding the bloodshed that would tear apart the rest of the region over the next decade.

Without an overhaul of the overburdened banking sector, labor reforms and a sell-off of state assets, Slovenia may soon be unable to find affordable financing and repay some 2 billion euros of outstanding debt due in mid-2013.

Jansa, embroiled in a property scandal, has been gradually abandoned by his coalition partners since the turn of the year, further shaking market confidence that Slovenia can do what it takes to steady the ship. He denies any wrongdoing.

Faced with the threat of a second snap election in one year, the Social Democrats and two of Jansa's former allies struck a deal with Bratusek to hand her the reins for 12 months, with an option to keep her at the helm until an election due in 2015.

Bratusek oversaw the state budget at the Finance Ministry for six years before entering parliament in December 2011.

But given the policy differences in the new coalition - which would group the center-right Civic List and pensioners' party Desus from the previous government with the two centre-left opposition parties - it is not likely to be plain sailing.

"BAD BANK"

Bratusek's PS and the Social Democrats have opposed a plan by Jansa's cabinet to set up a "bad bank" where bad loans would be parked to allow local lenders to be recapitalized and sold.

European Central Bank board member Joerg Asmussen said on Monday the bad bank was a priority if Slovenia was to retain access to foreign financing.

"It looks like the bad bank plan may not fly but they can probably find a different way, there are several variants," said Borut Hocevar, a political analyst at the Finance newspaper.

Estimates suggest a bailout for Slovenia could run to 5 billion euros, mostly for shoring up its banks. Although small by the standards of Greece or Ireland, a bailout would be politically awkward when the euro zone is also wrestling with financial woes in Spain, Italy, Portugal and Cyprus.

It would be much tougher on Slovenia itself, forcing the government to make more spending and job cuts, but under international supervision.

For some of the Slovenes who have taken to the streets in their thousands since November to rally against corruption and the political elite, a change of prime minister was only a fig leaf.

"If they bite the bullet and work hard, they might just succeed," said pensioner Drago Ikic in the capital, Ljubljana. "But if they fail, then really all the politicians should just leave and call an early election."

Parliament will probably vote on Bratusek's proposed cabinet in late March. ($1 = 0.7649 euros) (Writing by Matt Robinson)