UPDATE 4-Slovenia says to save banks alone, brings relief for EU
* Central bank announces stress test results
* Slovenia can probably plug gaps without a bailout
* Ex-communist economic star, fallen from grace
* Big state-owned banks choked by bad loans
By Zoran Radosavljevic and Laura Noonan
LJUBLJANA, Dec 12 (Reuters) - Slovenia's banks need to find 4.8 billion euros to stay afloat, the government acknowledged on Thursday, but said it could raise the funds without joining the euro zone bailout line.
The country of just two million people, once the economic star of Europe's ex-communist east, had threatened to breathe fresh life into the euro zone's debt crisis.
But the figure, taken from the results of an external audit, was deemed manageable, drawing a sigh of relief from the European Union.
"Today it is clear that Slovenia can proceed with the repair of its financial sector without turning to her European partners for financial assistance," EU Economic and Monetary Affairs Commissioner Olli Rehn.
But even if Slovenia averts a calamity now, the crisis has exposed the flaws - notably widespread crony capitalism - of a country once hailed as a model of post-communist prosperity and stability.
In reality, the state controlled around half the economy through a tangled web of ownership, doling out loans through state-owned banks to the politically well-connected.
It now faces drawn-out pain as it remakes the economy, which has shrunk 11 percent since the global downturn of 2008.
A fire sale of national assets once considered sacrosanct, including Telekom Slovenia, is set to ensue.
When the crisis hit, Slovenia's vital exports of Renault cars, kitchen appliances and pharmaceuticals hit a wall and the loans that banks are unable to recoup have since soared to almost 9.5 billion euros ($13 billion).
Even if Slovenia saves the banks, the damage goes deep.
Christmas lights and mulled wine in the capital, Ljubljana, barely masked the gloom among ordinary Slovenians.
"Frankly, we're screwed," said 67-year-old pensioner Vinko Erjavec. "I'm afraid for the future of my grandchildren. I hope they'll be smart enough to leave the country."
"NO CHANCE" OF BAILOUT
Slovenia accounts for just 0.3 percent of EU output and for the euro zone, the numbers involved are tiny compared with the more than 200 billion euros poured into Greece.
But another rescue would have sown doubts about the bloc's insistence it can put the debt crisis behind it.
Besides, there is little stomach in European capitals, particularly paymaster Berlin, to bail out another of the euro zone's 17 states, having already rescued Greece, Ireland, Portugal, Spain and Cyprus over the past five years.
Unveiling the results of an external assessment of Slovenia's banks, central bank governor Bostjan Jazbec said the three biggest lenders - all wholly or partly state-owned - would need some 3 billion euros in extra capital from the government.
It will also impose 100-percent losses on junior bondholders to reap some 440 million euros.
Jazbec said the rest would come from gains as the banks transfer assets to a bad bank. Five smaller banks would be given until June 2014 to raise around 1.1 billion euros from private capital.
"There is no concern or need to doubt these results," Jazbec said. "All the measures adopted today are urgently needed. This is a precondition to restart economic growth."
Asked later whether the risk of a bailout might resurface in the future, Finance Minister Uros Cufer told reporters: "If you had asked me the same question six months ago I would have said 'No chance', and I say the same thing today."
The cost of Slovenia's government borrowing fell close to nine-month lows on Thursday after announcement of the stress test results.
"This is a credible number, and the market will be relieved that it is on the table now," Timothy Ash, head of emerging markets research at Standard Bank, said of the audit result.
Ronny Rehn, head of European Banks research at London-based KBW, called it a "credible test with fairly robust economic assumptions."
However, the banks need to balance their books and the government will have to continue cutting spending and chipping away at its generous social protections, having already raised the retirement age and cut public sector wages. Such steps will test the unity of the disparate ruling alliance.
It will now proceed with a plan to ring-fence around 4.5 billion euros of non-performing loans in a 'bad bank', leaving healthy banks that would be easier to sell.
It needs EU approval to begin the transfer, though the bloc's initial response to the audit results suggested this would be forthcoming.
The measures will take Slovenia's general government level to 75.6 percent of gross domestic product (GDP).
It marks a dramatic fall from grace, 22 years after Slovenia slipped away from Yugoslavia as the rest of the federation imploded in war, taking a fast-track to membership of the EU in 2004 and the euro zone in 2007.
Slovenia's young now face joining the ranks of Europe's 'lost generation', their job prospects ravaged.
"I don't see any opportunity for progress here," said 25-year-old Jure Martinec, a graphic design student. "People are just trying to get by," he said.
Lamenting the cost of crony capitalism, he added: "We're so small that everyone knows each other, everything works through connections, and I don't see anyone trying to change it."