Billions of euros in bad loans held by Slovenia's biggest state banks are at the centre of speculation that the tiny ex-Yugoslav republic may become the latest member of the 17-nation euro zone to seek an international rescue.

Trying to reassure financial markets, Slovenia's coalition government has established a 'bad bank', known as The Company for Management of Bank Claims (DUTB), to ring-fence some 3.3 billion euros (2.8 billion pounds) in bad loans, or just under half the total estimated amount of bad debt in the Alpine country.

DUTB executive director Torbjorn Mansson said the first transfer should be completed by June 28, rebuffing suggestions that the operation may be delayed by a European Commission audit which is expected to show the debt problem is worse than feared.

Andrej Sircelj, president of DUTB's management board, said the transfer of bad loans from Slovenia's biggest bank, Nova Ljubljanska Banka (NLB), was already under way.

The banks will receive state-guaranteed bonds worth 1.1 billion euros in return.

Sircelj said DUTB would take on loans from NLB, Nova KBM, Abanka Vipa and possibly others, and that the 'bad bank' would issue bonds once the final transaction numbers were known.

He later told Reuters the DUTB may issue its first bond in July, though he declined to provide details of the issue.

CREDIBILITY

Mansson said he expected three banks to be on board within six weeks.

A European Union official has told Reuters the credibility of the Slovenian cleanup is more important than its speed and said the external audit of banks should be completed in weeks, though Ljubljana has not yet chosen the auditor.

Slovenia's big state lenders are nursing the lion's share of some 7 billion euros in non-performing loans in Slovenia, equivalent to one fifth of the economy.

The rate of non-performing loans shot up with the onset of the global crisis, when Slovenia's export-driven economy hit a wall and a recession exposed a culture of cronyism and mismanagement at the big state lenders and major state-controlled companies.

Ex-communist Slovenia has shied away from privatising its major banks and big state firms, leaving around 50 percent of the economy under state control.

The former Yugoslav republic has to pump 900 million euros into the top three banks by the end of July to bring capital ratios into line with European rules. ($1 = 0.7492 euros)

(Reporting by Marja Novak,; Writing by Matt Robinson, Editing by Gareth Jones)

By Marja Novak