* 'Bad bank' central to Slovenia's fight to avoid a bailout
* EU delayed bad loan transfers pending stress tests
* EU fears central bank underestimated extent of crisis
* Delay in getting bad bank running increases chance of a bailout
By Marja Novak
LJUBLJANA, Aug 28 (Reuters) - Five months after Slovenia set up a "bad bank" to absorb billions of euros in toxic debt from its state-run banks and avoid joining the euro zone bailout club, it doesn't even have a website to its name, let alone a bad loan.
The government of the former Yugoslav republic says overhauling the banks is an urgent task and had planned a first transfer into the Company for Management of Bank Claims, or DUTB, in June, but the European Commission put a stop to that pending an external audit to uncover the true extent of the problem.
That could shunt the first loan transfer into next year, increasing the risk that this country of 2 million, once a rising star among the ex-communist states, could set off the next convulsions in the euro zone debt saga.
"The delay of the asset transfers has a possibility of self-reinforcing the banking asset crisis," analysts from Nomura warned in a recent note.
"As the economy continues to deteriorate, with particularly strong contraction seen in the household sector, the number of NPL's (non-performing loans) continues to climb rapidly and of course with them the cost of running BAMC and recapitalizing the state banks," it wrote, using the English abbreviation of the bank's official title.
Estimates of when the transfers might begin range from the last quarter of this year to the first quarter of next.
The central bank says Slovenia's mainly state-owned banks are nursing 7.5 billion euros in bad loans, equivalent to around 21.5 percent of gross domestic product (GDP), of which the DUTB is due to take on around half.
The European Commission fears that is an underestimate.
The central bank last week extended the stress tests, conducted by consultants at Oliver Wyman, to 10 out of 18 local banks and said results were expected by the end of the year. It still says the first transfer could happen this autumn.
Some analysts yet see some hope in the extra caution, suggesting Slovenia may finally face up to the full extent of the crisis, reassuring markets it is serious about a solution.
"The fact that the current stress test encompasses essentially all Slovenian banks is a very positive development," said Slovenian economist Egon Zakrajsek, who works for the U.S. Federal Reserve System but was commenting in a private capacity.
He said there had been a "radical change" in approach under central bank Governor Bostjan Jazbec, who took over in July.
The audit may indicate that the government will have to inject more into its banks than the 1.2 billion euros planned.
"But the good news is, if these delays are solely due to the fact that the tests are more rigorous, then this is likely to have a positive impact on the market in terms of confidence," Myles Bradshaw, a specialist in European macro-economic strategy at investment firm PIMCO, told Reuters.
"If the tests are completed under the direction of the Commission, then it is more likely that the financing of the recapitalisation effort will be completed with the support of the Commission, too," he said.
FEARS OF SLIPPAGE
The central bank says the exercise will be supervised by a committee comprising representatives of the European Commission, the European Central Bank, the European Banking Authority as well as the Slovenian central bank and finance ministry.
The central bank told Reuters it did not foresee any fallout from the delay - yet.
"The public has already been informed about the postponement of the transfers ... from June to the autumn, so no negative impact is expected," it said. "However, any postponement beyond that could have a negative impact on financial markets."
And the impact could spread to Slovenia's partners in the 17-nation currency bloc.
The euro zone has enjoyed relative calm since the Cypriot bailout in March, but another rescue, even a small one of up to 10 billion euros, could spook investors already nervous about U.S. plans to taper off its monetary stimulus, political uncertainty in Italy and a possible U.S.-led military strike against Syria.
Slovenia's export-driven economy, which boasted the euro zone's fastest growth when it joined the bloc in 2007, hit a wall with the onset of the global crisis in 2008. Two recessions since then have exposed a culture of corruption, cronyism and resistance to competition.
The country must give up its hold over 50 percent of the economy through state-run banks and enterprises. It has slated more than a dozen for sale.
Its once enviable debt levels have doubled to 54 percent of GDP due to the cost of saving its banks and are expected to rise to nearly 62 percent this year.
Earlier this year, the Paris-based Organisation for Economic Cooperation and Development warned the debt level could reach 100 percent by 2015 if Ljubljana does not embrace reform.
On Monday, Gaspar Gaspar Misic, who until last week was a member of Prime Minister Alenka Bratusek's cabinet, was appointed CEO of Slovenia's only port operator, state-owned Luka Koper. Though Bratusek personally did not support Misic's appointment, the move flew in the face of a pledge to reduce political influence over the economy.
Slovenia's budget deficit is forecast to hit 7.9 percent of national output this year. The government hopes to bring it down to 3 percent in 2015.
Buying some time, the country issued $3.5 billion of bonds May, with the yield on a 10-year bond reaching 6 percent. It will have to tap markets again no later than the first quarter of 2014 before its 1.5 billion euro five-year bond expires on April 2.
The yield on Slovenia's 10-year benchmark bond was 6.63 percent on Wednesday, according to Reuters data, close to the 7 percent level investors consider unsustainable.
Andraz Grahek of Capital Genetics said Slovenia was still able to tap markets for funding but that could become increasingly difficult as the country's debt ratio rises.
"A possible bailout for Slovenia would carry a relatively small cost of up to 10 billion euros and should not be as shocking as the previous ones," he said.
"However, it would remind investors of the unpredictability of the region."