LJUBLJANA Slovenia's coalition government, which averted an international bailout last year, could collapse on Friday if Prime Minister Alenka Bratusek loses the leadership of her party, Positive Slovenia.
That could mean a snap election only months after the small euro zone economy managed to rescue its troubled banks without international help in December, pumping 3.3 billion euros ($4.5 billion) of its own funds into its lenders.
The center-left Positive Slovenia will elect a leader late on Friday and Bratusek has indicated that she will quit the government if her challenger Zoran Jankovic, the party's founder and mayor of Ljubljana, becomes the new head.
"I can hardly imagine that I could lead the government without having the support of my own party," Bratusek told reporters earlier this week.
A government collapse and early elections would slow efforts to make Slovenia's economy more productive and could hurt sovereign bonds, whose yields have fallen back to their 2007 level in the past month as investors regained confidence in the government's budget management.
Jankovic was elected head of the party when he founded it in 2011 but stepped down in February 2013 to enable Bratusek to form a new government. Many party members still see Jankovic as their leader and Positive Slovenia postponed a congress in October because his opponents feared it would offer him a chance to regain its leadership.
Bratusek's three coalition partners have said they would not cooperate with a party led by Jankovic, who is under investigation for corruption. He has denied the allegations.
"The vote will be tight. If reason prevails, Jankovic should not win but there are many party members who support him blindly," said Meta Roglic, a political analyst at daily Dnevnik.
"I expect Bratusek will resign immediately if Jankovic is elected. As it is very unlikely that another coalition could be formed within the present parliament, we can expect an early election in late September or October," Roglic said.
CHALLENGE TO BANK CLEAN-UP
Slovenia was the first republic to break away from Communist Yugoslavia and the fastest growing euro zone economy in 2007 when it joined the monetary union. But the global financial crisis exposed widespread reckless lending by state-owned banks which Bratusek's government has finally begun to clean up.
"A (possible) government breakup and the subsequent early elections will almost certainly slow down the pace of fiscal consolidation, structural reform and privatization," said Abbas Ameli-Renani, an emerging markets strategist at Royal Bank of Scotland.
Jankovic has criticized Bratusek's efforts to cut spending, saying the government should instead start infrastructure projects that would create new jobs.
The government plans to cut this year's budget deficit to 4.2 percent of gross domestic product (GDP), from 14.7 percent of GDP in 2013 when the state recapitalized banks.
Jankovic has also opposed the formation of a state "bad bank" to absorb bad loans from state-owned banks.
The government expects the economy to expand by 0.5 percent this year on account of higher exports, after two consecutive years of recession. ($1 = 0.7248 Euros)
(Reporting by Marja Novak; Editing by Zoran Radosavljevic and Ruth Pitchford)