LJUBLJANA Slovenia - struggling to avoid an economic bailout - will liquidate two small banks, Factor Banka and Probanka, to ensure the financial stability of its banking system, the country's officials said on Friday.
A statement by the finance ministry and the central bank said the government had provided guarantees totaling 490 million euros ($645 million) for Probanka and 540 million for Factor Banka, to ensure the repayment of their depositors.
Local banks, struggling with 7.5 billion euros of bad loans worth more than one-fifth of national output, are the target of speculation that Slovenia may follow other troubled euro zone members and seek an international bailout in the coming months.
Central bank governor Bostjan Jazbec, who also sits on the European Central Bank's governing board, said depositors would not lose out.
He said they would be able to withdraw money as before, "with no extra limitations" and there was "no basis for a run on the two banks", the first lenders to crumble since Slovenia's economy went downhill in 2009.
"What we are doing is designed to increase security of the bank deposits and improve stability of the banking system," Jazbec told an evening news conference.
But analysts said the action showed Slovenia might be on the brink of a bailout.
"The costs of a possible bailout could exceed 10 billion euros if the government continues to cover losses even in small banks which are not of systemic importance and are not state-owned," said Andraz Grahek of consultancy Capital Genetics.
Finance minister Uros Cufer said the controlled liquidation of the two banks had been approved by the European Commission.
The ECB said in a statement later on Friday that "the purpose of this action ... is to contribute to the stability of Slovene banking sector".
The two banks are privately owned and among the smallest lenders in the country of two million, together representing about 4.5 percent of its whole banking system.
Jazbec said earlier on Friday that "further activity of the two banks could significantly reduce financial stability in the Slovenian banking system".
"The Bank of Slovenia and the government are trying to prevent a similar scenario as in Cyprus and representatives of international institutions are ready to prevent that scenario," he said.
He did not give further details but Saso Stanovnik, chief economist at investment firm Alta Invest, told Reuters: "There is an impression that the ECB has a backup plan and will be ready to help Slovenia if needed."
He said he did not expect a bank run next week as officials had made clear deposits were guaranteed in full, not only up to 100,000 euros which is the standard guarantee in the euro zone.
All banks in Slovenia are closed on Saturday and Sunday.
Slovenia plans to start transferring bad loans to a state-owned "bad bank" in October.
Last month the central bank ordered external stress tests of 10 banks, including the two to be liquidated, with results due by December.
The country bought some time in May when it issued two bonds with a joint value of $3.5 billion but will have to tap the markets again no later than in the first quarter of 2014, before its 5-year 1.5 billion-euro bond expires on April 2.
A 10-year bond issued in May carried a yield of 6 percent while on Friday the yield on Slovenia's benchmark 10-year euro bond reached 6.8 percent, up from 6.75 at Thursday's close, according to Reuters data.
Slovenia was the fastest-growing euro zone member in 2007 but was badly hit by the global crisis due to its dependency on exports.
It has been struggling with a new recession since last year amid lower export demand, a credit crunch and a fall in domestic spending caused by budget cuts.
($1 = 0.7600 euros)
(Reporting by Marja Novak; editing by Andrew Roche)