* Slovenia finally opens up to foreign capital
* Trying to raise cash after saving banks
* Political tensions still unnerving markets
* For sale: Telekom, airline, airport, bank...
By Almir Demirovic and Zoran Radosavljevic
LJUBLJANA/ZAGREB, Jan 29 The gloves came off as Joseph A. Mussomeli neared the end of his tenure as Washington's envoy to Slovenia, a posting that coincided with the country's narrow escape from submission to an international bailout.
An American firm was in the running to buy Slovenia's Fotona, a state-owned developer of medical and military laser gear with big sales in the United States. It was a rare example of this ex-communist country, now proud of its euro zone membership, selling a treasured corporate possession.
"Everything was agreed," Mussomeli told the Slovenian daily Finance in December, a month before he left the country.
"Then, despite assurances from senior government circles, PDP (the state fund with a majority stake in Fotona) suddenly came forward and demanded the price go up by one million euros ($1.4 million).
"It's not so much about the money," he said, "it's just another example that puts Slovenia in a bad light abroad."
More than two years after it was first put up for sale, Fotona is first in line this week for privatisation by a state used to controlling 50 percent of the economy.
The American company, Technology4Medicine, is still in the running, alongside private equity fund Alpe-Adria-Balkan Fund.
Slovenian media reports have disputed Mussomeli's characterisation of the state fund's tactics. Either way, the country long expected to be the economic success story of the ex-Yugoslav republics has a dismal record on privatisation.
Having scraped together funds to bail out its banks last month, Slovenia must now sell assets once considered sacrosanct by 2 million Slovenians who, unlike the rest of Eastern Europe, resisted Western capital after the end of the Cold War.
The risk is that big companies go at knock-down prices to buyers keenly aware that Slovenia needs the cash urgently.
Some in the disparate coalition government are openly hostile to selling off healthy household names, regardless of the banking troubles blamed on politically-motivated lending.
"Privatisation is key to breaking the vicious circle of state-owned enterprises, state-owned banks and interests of political elites," said Otila Dhand of Teneo Intelligence, a London-based think-tank.
Final bids for Fotona are due on Thursday.
More than a dozen other companies are on the block, including Telekom, the biggest telecom group, Ljubljana airport, flag carrier Adria Airways and No. 2 bank NKBM.
Two recessions since 2009 have exposed corruption and crony capitalism. As the global crisis ravaged Slovenia's exports, bad loans at state banks soared to around 25 percent of national output.
"The arrival of foreigners is becoming a reality which we long refused to face up to," said Lidija Jerkic, head of Slovenia's national union of metal workers. "Given the dearth of cash and the state of our economy ... it's one of the last remaining options if we want to preserve it."
Prime Minister Alenka Bratusek told Reuters this week that the main state investment fund, SOD, "has informed us of a detailed timetable for the sale of 14 companies, which we have not made public yet."
Analysts, however, are doubtful. The Social Democrats, the second biggest party in the four-way ruling alliance, have openly opposed privatisation in the past.
"Our stand is that the strategy must determine which firms are of strategic interest, in which the state should keep a small controlling stake, and which should be sold off entirely," party leader Igor Luksic told Reuters last week in an emailed statement.
Former finance minister France Krizanic, a senior party ally of Luksic, was more direct: "We're not talking about a float on the stock exchange but a sale to likely direct competitors. With that, the national economy loses jobs and free cash flow."
After coalition talks on Monday, the Social Democrats appeared to support the sale of Telekom and Ljubljana airport, but said they had regrets. The agreement to sell "was not thought through," a party statement said.
"RULES OF THE GAME"
Such remarks will unnerve markets still uncertain whether Bratusek can hold the government together now that it has staved off the immediate threat of a bailout.
Telekom represents the biggest prize. The government is trying to attract interest from Deutsche Telekom and Telenor. It has hired Citi to organise the sale of a roughly 75 percent stake.
As for bank NKBM, recapitalised and now fully owned by the state, Slovenian media say Hungary's OTP and the European Bank for Reconstruction and Development (EBRD) may be interested.
"We will look positively at investments in the banking sector as well as in corporates, but we need a clearer sense of the rules of the game," EBRD chief economist Eric Bergloff told Reuters.
Another milestone could be the sale of leading local retailer Mercator to Croatian rival Agrokor. Negotiations have dragged on since 2011. "It will be resolved one way or another by the end of this week," a source close to Agrokor told Reuters.
Then there are the unions, up in arms after layoffs followed the October sale of the first company on the privatisation list, paint and varnish producer Helios.
"Unions will never agree to the formula 'more privatisations, fewer workers'," Slovenia's Association of Independent Unions wrote in an open letter to Bratusek last month.
As the sale of Fotona neared, however, union leaders appeared more resigned. "The buyer will probably be a foreigner. We can only hope they preserve the company in its current form," said Fotona union representative Bruno Reja.
"We do expect drastic changes, however, as happened with other companies sold to foreigners, like layoffs or closing of whole departments," he said. "Foreigners only focus on profit.