October 13, 2012 / 4:07 AM / 5 years ago

ECB's Kranjec says Slovenia can still avoid bailout: paper

LJUBLJANA (Reuters) - Slovenia can avoid a bailout provided the government presses ahead with economic and financial reforms, Central Bank head Marko Kranjec said in an interview published on Saturday.

“If Slovenia continues with public finance consolidation, labor market reform, pension reform and structural changes ... it will not have to ask for international aid,” Kranjec, who also sits on the European Central Bank’s governing council, told daily Delo.

But Slovenia and other struggling developed economies would take a long time to recover, and would have to trim unsustainable social welfare systems, he said.

Export-oriented Slovenia was badly affected by the financial crisis and, following a short recovery, is now back in recession with a banking sector riddled with bad loans.

The International Monetary Fund urged it last week to privatize banks, raise the retirement age and relax labor laws, steps that Prime Minister Janez Jansa said last Friday he would take before the end of the year.

The country has also been shut out of bond markets but hopes to issue its first sovereign bond of the year in coming weeks, a $1.5 billion 10-year issue. It postponed a euro issue of similar maturity and size in April because indicated yields were above 5 percent.

But since then its benchmark yields have risen further, reaching 6.1 percent on Friday, according to Reuters data, having peaked at 7.6 percent in August as speculation over a bailout grew.

Kranjec said he expected bad loans in the Slovenian banking system - which amount to some 6.5 billion euros or 18.2 percent of GDP - to rise further. That meant the whole sector could post a loss this year and next as it did in 2011.

He said banks would need more capital after the government injected 381 million euros in July into the country’s largest lender, NLB, to meet EU capital requirements.

Kranjec urged the government to reconsider a plan to raise taxes on banks, which he said would weaken them further.

It plans to increase a number of taxes to cut the budget deficit below 3 percent of GDP in 2013 from 4.2 percent this year.

It also aims to form a ‘bad bank’ to take over state-owned lenders’ bad loans in exchange for state-guaranteed bonds.

The government is still seeking an agreement on the reforms with trade unions and the opposition, hoping to prevent referendums that could delay or scupper them.

Reporting By Marja Novak; Editing by John Stonestreet

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