UPDATE 1-Slovenia reaches wage cut agreement with trade unions

LJUBLJANA Tue May 14, 2013 8:35am EDT

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LJUBLJANA May 14 (Reuters) - Slovenia's government said it agreed with trade unions on Tuesday to cut the public sector wage bill this year in a reform economists say could help it fend off a bailout.

The cut, by 110 million euros ($143 million), or 2 to 3 percent, is among reforms Prime Minister Alenka Bratusek's cabinet hopes will cut a budget deficit expected to almost double to 7.9 percent of gross domestic product this year.

The wage reduction, however, is less than an originally proposed 158 million euros and the government said it aims to make up the difference through other savings in the sector.

"Public sector wages will be reduced by 2 to 3 percent," interior ministry spokeswoman Katja Mihelj Nagode told Reuters.

Since taking power in March, Bratusek's government has faced criticism from European Union officials for slow progress on selling state firms, bailing out Slovenian-owned banks and trimming its budget deficit.

Fearing that Slovenia could follow Cyprus as the next euro zone bailout recipient, investors drove up Ljubljana's borrowing costs, although the government managed to issue a $3.5 billion bond that will cover its finances for the rest of the year.

The deficit is this year expected to soar mostly because of Slovenia's banking sector, which is dominated by three state-owned lenders and struggling under around 7 billion euros of bad loans.

Last week the government delivered a reform plan to Brussels outlining plans to recapitalise the three largest banks, largely state-owned, by 900 million euros by the end of July to ease the credit crunch and enable their eventual sales.

It also plans to increase value added tax and sell 15 of the state firms that make up around half of Slovenia's economy.

"The government will have to work further on reducing public sector wages and the number of employees in the sector," said Marko Rozman, an analyst at privately-owned Dezelna Banka.

On Monday, EU Economic and Monetary Affairs Commissioner Olli Rehn said it was too early to say whether the plans were "sufficiently strong and credible".

"There is no time to waste," he said.

But with global investors eager to pick up higher returns, the finance ministry sold 55 million euros in three- and six-month treasury bills on Tuesday, with yields falling on the latter by 0.2 points to 1.5 percent.

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