LJUBLJANA Slovenia tasked the mayor of its capital city on Monday with establishing a government to stop the euro zone member's slide back into recession, and he faces potentially weeks of tough coalition talks.
The European crisis claimed its latest scalp on Sunday with the Social Democrats of prime minister Borut Pahor relegated into third place by voters angry over rising unemployment in the former Yugoslav republic.
Zoran Jankovic, the centre-left mayor of Ljubljana and former manager of Slovenia's largest food retailer Mercator, took 28 seats in the 90-seat parliament, and will need partners in government.
Even if he gets them, there were concerns on Monday that the coalition might prove too unwieldy to carry out the painful reforms analysts say are necessary, including a divisive pension reform.
"There is a big question mark over how strong Jankovic's government will be ... whether it will be able to push through parliament the legislation necessary to stop the growth of public finance spending," Slovenian daily Finance said in an editorial.
A test of confidence will come on Tuesday when the Finance Ministry will attempt to sell up to 1 billion euros of 18-month treasury bills to roll over debt at the start of 2012.
Five-year Slovenian credit default swaps fell 5.01 percent to 374 basis points by 0844 on Monday, according to Markit data, but were still 104 percent higher than three months ago.
Bojan Ivanc of KD Banka attributed the fall to signs of French-German progress on the euro zone crisis, "rather than a reaction to the Slovenian election."
The blue-chip SBI index eased slightly in Monday morning trade, down 0.19 percent to 609.2 points by 0844 GMT.
DIVISIVE PENSION REFORM
The Alpine state of 2 million people was the fastest growing euro zone member four years ago, but its export-driven economy was badly hit by the global crisis and shrank by 8 percent in 2009.
After a mild recovery in 2010, figures released last week suggest another recession is on the way. The economy contracted 0.5 percent year-on-year in the third quarter.
The budget deficit soared to 5.8 percent in 2010 from zero in 2007.
Sunday's election result was an upset, with opinion polls predicting for weeks that victory would go to the centre-right Slovenian Democratic Party of former prime minister Janez Jansa.
Jansa said that, given the tight result, he did not believe the next government would last its 4-year mandate. Pahor's crumbled in May and was voted out by parliament in September, forcing a snap election.
"Forming a coalition will be difficult," Tanja Staric, a political commentator for the Slovenian daily Delo, told Reuters. "Jankovic will have to offer a coalition to virtually all small parties in parliament, and the differences are big."
Analysts said the Social Democrats, with 10 seats, were likely to get a share of power again in coalition with Jankovic's party, List of Zoran Jankovic - Positive Slovenia.
Jankovic was also likely to look to the centrist Civil List of Gregor Virant, the pensioners party Desus and possibly the centre-right Slovenian People's Party.
In its editorial, Finance said Jankovic would find it hard to push through a pension reform that would raise the retirement age for Slovenians from 57 for women and 58 for men, given opposition from Desus and trade unions.
A pension plan under the previous government was rejected in a referendum in June. Jankovic has also said he is against privatizing state-owned firms as a way to boost budget revenues and ease the credit crunch.
Jankovic says he plans to raise value added tax by 1 percentage point to 21 percent, a move opposed by two of his potential coalition partners.
(Editing by Matt Robinson)