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UPDATE 3-Slovenia says to save banks alone, brings relief for EU

Almir Demirovic and Zoran Radosavljevic
Thursday, 12 Dec 2013 | 8:05 AM ET

* 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

LJUBLJANA, Dec 12 (Reuters) - Slovenia's ailing banks need 4.8 billion euros in extra capital to stay afloat, a sum the small euro zone country said on Thursday it would raise alone without becoming the bloc's latest bailout recipient.

The figure, taken from the results of an external audit, drew a sigh of relief from the European Union.

After bailing out five euro zone countries over five years of financial turmoil, another aid package, regardless of how small, would have sown doubt about the bloc's insistence it can put the debt crisis behind it.

Even if Slovenia can avert a calamity now, however, it faces a drawn-out crisis as it remakes an economy that has already shrunk 11 percent since 2008.

Banks in Slovenia are saddled with an estimated 7.9 billion euros in bad loans - equivalent to more than a fifth of national output - after the global economic crisis crippled exporters and exposed how far Slovenia had ducked the shock therapy that revived other ex-Communist economies in Europe.

Unveiling the results of an external assessment of how much of the banks' lending has gone sour, central bank governor Bostjan Jazbec said the three biggest Slovenian banks - all wholly or partially state-owned - would need some 3 billion euros ($4.1 billion) in extra capital from the government.

It will impose 100-percent losses on junior bondholders to reap some 440 million euros.

The rest may 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 told a news conference. A government statement said the recapitalisation would ensure "a way out of the crisis," but analysts were still digesting the numbers.

"It is hard to see what the total cost is," said Igor Masten, Associate Professor of Economics at the University of Ljubljana. "There is much more they will have to clarify."

BORROWING COSTS DOWN

The European Union was nonetheless reassured.

"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 said in a statement.

The cost of Slovenia's government borrowing fell close to nine-month lows on Thursday after announcement of the stress test results.

But the state remains in control of around half the economy, through a tangled web of ownership that often goes back to the biggest banks.

Politically-motivated lending was rife.

Deleveraging the banks could send further shockwaves through the economy, with unemployment already over 12 percent.

The crisis represents a dramatic fall from grace for Slovenia, an ex-Yugoslav republic of 2 million people that for years was viewed as a haven of stability and economic health.

While the rest of Yugoslavia imploded in war in the 1990s, Slovenia took a fast-track to membership of the EU in 2004 and the euro zone in 2007. Exports of cars, kitchen appliances and pharmaceuticals made it the currency bloc's fastest growing economy that year.

CRONY CAPITALISM

The government had already received parliamentary approval to recapitalise the banks by up to 4.7 billion euros.

It now plans to ring-fence around 4 billion in a 'bad bank', leaving healthy banks that would be easier to sell. It needs EU approval to begin the transfer of loans.

The measures will take Slovenia's general government level to 75.6 percent of gross domestic product (GDP).

A fire sale of national assets once considered sacrosanct is set to ensue. They include No. 2 lender Nova KBM, Telekom Slovenia, flag carrier Adria Airways and Ljubljana international airport.

The government may also have to scrap some of its generous social protections, such as a rule requiring employers to give workers an allowance for lunch, having already raised the retirement age and cut public sector wages.

"This is a credible number, and the market will be relieved that it is on the table now, and realistic," Timothy Ash, head of emerging markets research at Standard Bank said of the stress test results.

But Christmas lights and mulled wine in the capital, Ljubljana, could not mask the gloom.

"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."