By Marja Novak
LJUBLJANA, Oct 8 (Reuters) - Slovenia will be in recession longer than expected and might need outside help to clean up its banks, the head of its central bank said, but agreed with the prime minister that the country still aimed to avert a bailout.
Premier Alenka Bratusek told parliament the government budget plans for 2014 and 2015 were designed to enable Slovenia 'to solve our domestic problems at home', without asking for international aid.
But she said the 'biggest unknown' was how much extra capital the government would need to pump into the banks, a sum that analysts said would determine whether the country managed on its own or would need a rescue.
'If the bank recapitalisation needs amount to 2 to 2.5 billion euros, Slovenia could still cover that without aid but if it proves capital needs are higher, aid would probably be inevitable,' Saso Stanovnik, chief economist of investment firm Alta Invest, said.
The mostly state-owned banks are carrying some 7.9 billion euros ($10.7 billion) of bad loans, equivalent to over 20 percent of GDP, and independent stress tests due in late November will determine how much fresh capital they will need.
The government has laid aside 1.2 billion euros to recapitalise its three largest banks but on Tuesday JP Morgan said in a report that total requirements could be close to 3.1 billion euros.
Whatever the size of the gap, it will have to be filled against the backdrop of a weaker than expected economy.
The central bank slashed its gross domestic forecast for this year on Tuesday, saying the economy is expected to contract by 2.6 percent rather than the 1.9 percent it predicted in April.
It cut its 2014 forecast to a contraction of 0.7 percent, from growth of 0.5 percent.
Meanwhile, the International Monetary Fund cut its forecasts to falls of 2.6 percent this year and of 1.4 percent in 2014.
Slovenia was the fastest growing euro zone member in 2007 but was badly hit by the global crisis due to its dependency on exports.
It fell into recession last year amid lower export demand, a credit crunch and lower domestic spending caused by budget cuts.
HIGHER DEBT COSTS
Central Bank governor Bostjan Jazbec, who also sits on the ECB governing council, said yields on Slovenian sovereign debt needed to fall.
If that failed to happen 'there is a possibility to ask for (outside) help within various programmes.'
Slovenia bought itself some time in May when it issued two bonds for $3.5 billion with the yield on a 10-year issue reaching 6 percent.
Since then yields have risen, and the 10-year yield traded at 6.82 percent on Tuesday, slightly lower than on Monday, according to Reuters data.
Slovenia will have to tap the markets again no later than in the first quarter of 2014 before a 5-year, 1.5 billion euro bond expires on April 2.
Finance Minister Uros Cufer had said the country will have to borrow some 4 billion euros next year to cover its budget needs and maturing debt.
Parliament is due to adopt the budget plans in November and Bratusek had said she would link a confidence vote for her government to the vote on the 2014 budget in order to increase political stability.
($1 = 0.7368 euros)
(Reporting by Marja Novak; Editing by John Stonestreet) Keywords: SLOVENIA ECONOMY
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