One of the currency bloc's smallest economies, Slovenia plans to publish an external assessment of just how much lending has gone sour since the onset of global crisis in 2008 revealed how shallow its economic makeover had been.

The government insists it can plug the hole in the bank balance sheets alone, without following Greece, Ireland, Portugal, Spain and Cyprus in seeking a bailout from the European Union and International Monetary Fund.

Analysts, however, fear a quick fix may only delay the inevitable - Slovenia is expected to remain in recession until 2015, while the banks, many of them state-owned, write down bad debts and sell their stakes in companies from newspapers to supermarkets.

"A lot of Slovenian companies have staff who are not working and getting paid - most of those are going to get fired after privatisation," said Saso Stanovnik, an economist at Slovenian brokerage Alta, referring to the likely sell-off of bank holdings.

"In the long term that will be beneficial as the workers are unproductive. In the short term it's going to generate a lot of unemployment and a lot of unhappiness."

Forecasts suggest the stress tests may reveal a hole of 4 billion to 5 billion euros ($5.5 billion to $6.9 billion), a sum the government believes it can raise through its own cash reserves of 3.6 billion euros, by burning junior bondholders for some 500 million euros and, if necessary, tapping financial markets.

DRAMATIC TURNAROUND

Prime Minister Alenka Bratusek is expected to convene her cabinet at 8 a.m. (0700 GMT) on Thursday. It has already received parliamentary approval to recapitalise the banks, of which the biggest three are wholly or partially state-owned, by up to 4.7 billion euros.

A significantly higher price would set alarm bells ringing in Brussels, with euro zone paymaster Germany particularly reluctant to call on its taxpayers again.

Squeezed between Italy, Austria, Hungary and Croatia, Slovenia slipped away from Yugoslavia in 1991 while the rest of the federation imploded in war.

The country of just two million people seemed the model convert from Communism when it joined the euro zone in 2007 and promptly became the bloc's fastest growing economy, exporting cars, kitchen appliances and pharmaceuticals.

But the global crisis dried up demand, drove up bad loans and exposed how far Slovenia had ducked the shock therapy much of eastern Europe went through with the end of the Cold War.

The state remains in control of around half the economy, through a complex web of ownership that often goes back to the biggest banks. Politically-motivated lending was rife.

"We supported companies at too high a price," a senior Slovenian banker, who declined to be named, told Reuters.

Disentangling the banks could send shockwaves through the economy, which has already shrunk 11 percent since 2008.

CRONY CAPITALISM

With unemployment at over 12 percent and rising, Slovenia is desperate to avoid the radical cuts in jobs and benefits imposed in Greece in return for more than 200 billion euros in aid.

The euro zone, too, fears more complaints that cost-cutting is ruining the job prospects of Europe's youth.

"I don't see any opportunity for progress here," said 25-year-old Jure Martinec, a graphic design student in the capital, Ljubljana, where Christmas lights and mulled wine mask the gloom. "People are just trying to get by," he said, and lamented Slovenia's cosy system of crony capitalism.

"We're so small that everyone knows each other, everything works through connections, and I don't see anyone trying to change it."

Banks in Slovenia are saddled with an estimated 7.9 billion euros in bad loans, equivalent to a fifth of national output. The lion's share is held by the big three state banks, who together admitted to losses of close to 390 million euros in the first nine months of 2013 and have some of the poorest capital ratios in Europe.

The government plans to ring-fence up to 4 billion in a 'bad bank', leaving healthy banks that would be easier to sell.

Slovenia has raised the retirement age and cut public sector wages. It also plans a fire sale of national assets, starting with 15 state-controlled firms including Telekom Slovenia, No. 2 lender Nova KBM, flag carrier Adria Airways and Ljubljana international airport.

There is already dissent within the coalition government over the sale of assets that were for years considered sacrosanct. Rifts may deepen if the immediate threat of a bailout is averted.

Alta's Stanovnik said foreign buyers may also be put off by some local laws, including one that forces employers to pay all staff an allowance for lunch and transport to work every day. ($1 = 0.7251 euros)

(Additional reporting by Almir Demirovic; Writing by Matt Robinson; Editing by Ruth Pitchford)

By Matt Robinson and Laura Noonan