Slovenia 'too slow" on bank cleanup but has cash: banker

Slovenia's government is moving too slowly in cleaning up its lending sector but the country has enough cash to stay afloat until autumn, the head of its banking association said on Wednesday.

Following last month's messy Cyprus bailout, the country of 2 million people is struggling to avoid becoming the euro zone's next rescue victim as it tries to clean up state-owned banks choking on bad loans worth a fifth of the economy.

A three-week-old, center-left government led by Prime Minister Alenka Bratusek is now trying to push on with a plan to shift defaulted loans to a bad bank before recapitalizing the lenders and selling them into private ownership.

Investors and multi-lateral institutions have complained of a lack of details on the government's plan and conflicting statements on its financial position up to June, when Slovenia must roll over 1 billion euros ($1.3 billion) in debt.

But France Arhar, head of the Slovenian Banking Association, said the government had cash reserves at a level that Slovenia's finance minister has said should last at least until September.

"The government has more than 2 billion euros in deposits," he told Reuters in an interview.

But he criticized the slow pace of the plan, which includes identifying bad loans in the country's three biggest banks - Nova Ljubljanska Banka, Nova KBM , and Abanka Vipa - in which the state holds large stakes.

"The bad bank can work although its implementation is too slow," he said.

The former Yugoslav Republic is the only ex-Communist European Union state that has not privatized its biggest banks, a strategy that led to a poisonous mix of political influence, bad management and disastrous lending.

The European Commission warned on Wednesday of deepening economic problems in countries including Slovenia, saying it must take urgent steps to offset the risk of a wider destabilization across the euro zone.

Arhar said in the past there had been reluctance by two parties in the ruling coalition to create a bad bank because there were fears that it would lead to the discovery of names of "bankers who had made bad decisions". But now because of Cyprus and the markets there was new impetus to solve the problems.

"We have no more time," he said. "We know what promises the government has made but we need to see something in practice. This is the most important thing."

PRECAUTIONARY DEAL

In a report on Wednesday, the International Institute of Finance, the world's main banking lobby group, said the government would likely refinance the debt coming due in June by selling new treasury bills to the troubled banks.

But the lenders would see increased liquidity pressure as government deposits decline during the year, a predicament that could be solved by seeking a precautionary credit line, it said.

"Sentiment would be reinforced, however, by an agreement on a precautionary contingent credit arrangement that would make government bonds eligible for primary market purchases by the ESM," it said, referring to the euro zone's rescue fund.

The report followed statements from the OECD club of developed economies, which issued a harsh report on Slovenia on Tuesday, saying it may have significantly underestimated the cost of the bank bailout, which the IMF estimates will cost around 1 billion euros this year.

The OECD also recommended Slovenia conduct new stress tests on the banks and publish the results, and sell the government's full stakes in the three biggest lenders.

Arhar said the 1 billion price tag should be correct, but indicated the privatization process may still face hurdles in a country where successive governments have kept strategic companies under state control, citing "national interests".

"I believe that one bank, at minimum, must be sold but it is difficult to say when that will happen," he said. "It is important to start with one to convince the population that the privatization is not a bad thing."

If privatization did not address the problem, he said "consolidation of the banking sector will be the next step."

After the OECD report, investors in Slovenia's illiquid debt markets retreated, driving yields on one-year debt almost 50 percent higher to 2.99 percent in an auction of treasury bills

Arhar chalked it up to a "lack of clarity surrounding the banks".

"Markets are awaiting the government's plans," he said.

($1 = 0.7658 euros)

(Writing by Michael Winfrey; Editing by Ruth Pitchford)