By Marja Novak
LJUBLJANA, Nov 5 (Reuters) - Slovenia's budget deficit is set to soar to 7.1 percent of GDP next year, the European Commission said on Tuesday, the result of moves to recapitalise Slovenian banks in an effort to avert an EU bailout.
Without the need to recapitalise the banks, which is at the heart of speculation that Slovenia could need international aid, the deficit would be 4 percent of GDP in 2013 and 3.6 percent next year, the Commission said.
It is set to be 5.8 percent this year, well above the 3 percent required of euro zone members.
The Commission said Slovenia's economy would contract by 2.7 percent this year and a further 1 percent in 2014, making it one of the poorest performers in the euro zone, which Slovenia joined in 2007.
In May, the Commission forecast a 2 percent fall this year and a marginal decline of 0.1 percent in 2014.
Local banks, mostly state-owned, are nursing some 7.9 billion euros ($10.67 billion) of bad loans, which equals about 22 percent of the country's economy.
Slovenia plans to inject fresh capital into the banks later this year or in early 2014, after getting the results of the bans' external stress tests demanded by the Commission.
The government of the 35-billion-euro economy has earmarked 1.2 billion euros for the recapitalisation of the main banks but analysts expect stress tests could show much higher capital needs.
The new GDP forecast is broadly in line with the projections by the government and the Bank of Slovenia, which expect the recession to last until late 2014.
'A tepid recovery of the economy is forecast to start only in the second half of 2014 and to continue in 2015, albeit at a very slow pace. The rebound would be driven by net exports, as global economic conditions improve,' the Commission said.
The Commission projected Slovenia's public debt would steadily rise to 74.2 percent of GDP in 2015 from 63.2 percent of GDP this year.
Slovenia was the fastest rising euro zone member in 2007 but hit a brick wall when the global crisis started due to its dependency on exports. It fell into a new recession in 2012 amid lower export demand, credit crunch and a fall of domestic spending caused by budget cuts.
The government claims it will be able to avert a bailout by reforms which include tax increases, spending cuts and privatisation.
($1 = 0.7402 euros)
(Reporting by Marja Novak; Editing by Zoran Radosavljevic and Jeremy Gaunt) Keywords: EUROZONE SLOVENIA/
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