Legislators dismissed conservative Janez Jansa's cabinet on Wednesday night after just a year in office and handed the baton to Alenka Bratusek, a center-left finance expert tasked with preventing the fourth financial rescue of a member of the currency bloc since 2008.
"Considering that Slovenia is still under the EU average in terms of public debt, I still believe that with the steps we will take Slovenia will solve the position of its public finances on its own," Bratusek, leader of Positive Slovenia, told Reuters in an interview on Thursday.
Slovenia's public debt is well below the EU-tolerated ceiling of 60 percent of GDP, at 46.9 percent at the end of 2011, but its banks are heaving under 7 billion euros ($9.18 billion) of bad loans, equivalent to 20 percent of GDP.
A member of the EU since 2004, the country of 2 million people has gone from economic trailblazer for the rest of eastern Europe when it joined the euro zone in 2007 to the latest ailing member of the 17-nation currency bloc.
With Slovenia's biggest export markets ravaged by a downturn in Europe, data released on Thursday showed a worse-than-feared contraction of the 35-billion-euro economy in 2012 of 2.3 percent, including a 3 percent year-on-year fall for the fourth quarter. Unemployment is at a 14-year high of over 12 percent.
Spending cuts and allegations of government corruption have fuelled angry protests of a kind not seen since Slovenia split from federal Yugoslavia in 1991 and escaped the bloodshed that would tear apart the rest of the region over the next decade.
Speculation is rife that without urgent reform Slovenia may be unable to find affordable financing and repay some 2 billion euros of outstanding debt due in mid-2013.
Bratusek said her actions should appease investors.
"Considering that our program envisages agreement on three key things: overhaul of banks, consolidation of public finances in a way that will not curb growth, and better management of state assets, I believe we will reassure the financial markets," she said.
Slovenian 5-year credit default swaps, a measure of the cost of insuring its debt, were at 260 basis points on Thursday, having narrowed from 265 at Wednesday's close, according to Markit data.
BANKS THE PRIORITY
Parliament will probably vote in late March on Bratusek's proposed cabinet, which will also comprise the Social Democrats and two parties formerly allied to Jansa. They abandoned Jansa over a property scandal exposed by an anti-graft commission, though he denies any wrongdoing.
If confirmed, Bratusek will be Slovenia's first female premier and could stay at the helm until an election due in 2015.
But given the policy differences in the new coalition - which would pair the center-left camp with the center-right Civic List and pensioners' party Desus from the previous cabinet - it is unlikely to be plain sailing.
The parties already differ on the need for a "bad bank", which Bratusek earlier opposed, as a place to park bad loans and unburden local lenders to be recapitalized and sold. Bratusek said overhauling the banks was her number one priority.
"This must be solved as soon as possible, in the least costly way that is good for banks and for the economy. It is not a 'Yes' or 'No' to the bad bank; we need a combination of recapitalizing the banks and cleaning up the bad loans," Bratusek said.
Soaring bad loans, the result of political meddling and bad management, have made fresh lending virtually impossible.
Estimates suggest a bailout for Slovenia could run to 5 billion euros, mostly for shoring up its banks. Although small by the standards of Greece or Ireland, a bailout would be politically awkward when the euro zone is also wrestling with financial woes in Spain, Italy, Portugal and Cyprus.
In a speech to parliament before Jansa's ouster, Bratusek came out strongly against more austerity.
But Timothy Ash, emerging markets analyst at Standard Bank, said she could struggle to balance pro-growth policies with the "pretty orthodox solutions" required to fix the banks.
"I guess this vote will be seen as a positive, and at least a move to try and resolve the political crisis, as the Jansa administration was in a state of paralysis in the end," he said.
"My sense is that political parties want to avoid early elections, as the Italian elections show that they can have uncertain results especially when the population is disillusioned with the political class." ($1 = 0.7628 euros)
(Editing by Matt Robinson and Peter Graff)