UPDATE 2-Slovenia has funds to recapitalise banks -central bank

Tue Dec 10, 2013 12:21pm EST

* Central bank indicates stress results already in

* Says recapitalisation will be fast

* Fuels confidence Slovenia will not need EU/IMF bailout

By Almir Demirovic and Matt Robinson

LJUBLJANA, Dec 10 (Reuters) - Slovenia has the funds to recapitalise its ailing banks, the central bank said on Tuesday, indicating that it had seen the results of stress tests due this week and Europe would not need to bail out another member of its troubled currency union.

The test results are expected to be announced within days. They will determine whether Slovenia can fix its banks alone or must follow Greece, Ireland, Portugal, Spain and Cyprus in seeking aid from the European Union and International Monetary Fund.

Slovenia is desperate to escape the tough terms and intense monitoring of a bailout. The euro zone - paymaster Germany in particular - wants just as badly to avoid another call on its taxpayers.

The central bank noted that a bill had been passed allowing the government to inject up to 4.7 billion euros ($6.45 billion) into the banks.

"The appropriate legal basis for their recapitalisation has been prepared and the government has the funds for that purpose, so the recapitalisation will be implemented very quickly," the central bank said.

It assured Slovenians that banks would continue to operate normally once the results are published, probably on Thursday or Friday. In Cyprus, banks were temporarily closed and capital controls introduced to prevent a flight of cash at the height of its banking crisis in March.

Slovenia's banks are saddled with an estimated 7.9 billion euros in bad loans, after two recessions since the onset of the global crisis crippled the country's exporters. The bad loans equal about a fifth of output in Slovenia, a country of just 2 million people.

The crisis has exposed a system of crony capitalism. Slovenia avoided the kind of shock therapy seen elsewhere in ex-Communist Eastern Europe after the Cold War. Around half the economy remained in state hands, including the country's biggest banks, which doled out suspect loans.

The central bank said this year that 18.3 percent of the total loan portfolio of Slovenia's big domestic banks were non-performing, far higher than a euro zone average of 7.15 percent last year.

Two sources familiar with Slovenian banks have told Reuters that the asset-quality review had uncovered non-performing loan ratios well above those disclosed by the central bank.

DRAMATIC TURNAROUND

Officials and analysts say they expect the stress tests to reveal a shortfall 4 billion to 5 billion euros that the government will have to plug. It is expected to use some 3.6 billion euros of its own cash deposits and force 500 million euros of losses on junior bondholders.

It may also tap financial markets, although the government said last week it may not need to, after placing a three-year, 1.5 billion-euro bond with a sole mystery buyer last month.

A 'bad bank' established earlier this year is on stand-by to ring-fence up to 4 billion euros of bad loans, leaving healthy banks that would be easier for the state to sell.

Slovenia accounted for just 0.3 percent of EU economic output last year. A bailout by the 'troika' of the EU, IMF and European Central Bank would be tiny compared with the 200 billion-plus euros poured into Greece. But Germany and other wealthier euro zone members have little stomach to dip into their own pockets again.

Even if it escapes without a bailout, Slovenia faces much pain ahead. It is a dramatic turnaround in fortunes for a country that slipped away from Yugoslavia in 1991 while the rest of the federation imploded in war.

Slovenia took a fast track to membership of the EU in 2004 and was the euro zone's fastest-growing economy when it joined in 2007. But economic output has shrunk 11 percent since 2008, and it is the only member of the 17-nation bloc besides Cyprus expected to see further economic contraction next year.

Unemployment has topped 12 percent and is expected to keep rising as the government cuts spending. The retirement age has gone up and public-sector wages have gone down.

Although Slovenia has resisted for years putting national assets in the hands of outsiders, it has now slated 15 state firms for privatisation, though there is dissent within the ruling coalition. The companies on the block include Telekom Slovenia, the national flag carrier Adria Airways and Ljubljana international airport.

Refusing to reveal the results of the stress tests, Prime Minister Alenka Bratusek told reporters in Moscow that the figures cited in the media were no more than "insinuation and guesswork".

"Let's wait a couple of days and see what the figures will be in the end," Bratusek said. "And, of course, we will handle all issues ourselves."

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