The announcement comes after the cabinet debated at its session the state of the country's banking sector and plans for the Slovenian Sovereign Holding, a super-custodian of state assets assuming the role of the Capital Assets Management Agency and bringing current state asset funds SOD, KAD and DSU under one roof.

Beyond this the government wants to craft a strategy giving the new holding the power to manage bad assets of Slovenian state-owned banks in a bid to clean up their balance sheets and deal with the ongoing credit crunch, Šušteršič said.

The bill on the Slovenian Sovereign Holding is expected to be debated by the cabinet next week so that parliament can pass it before the summer recess and the holding can come to life in the autumn, he announced.

Šušteršic said under the bad loan scheme red-flagged loans or those expected to sour would be transferred to the holding at fair value. This way banks would be cleansed of non-performing loans in one swoop instead of gradually getting their balance sheets in order through periodical write-downs as is the case now.

While admitting that the state will have to contribute to the mechanism initially, he said that it would be tweaked to ensure that in the mid-term banks would shoulder the bulk of the burden.

"This cabinet is under no illusion that the situation will fix itself," said Šušteršič, stressing that current data suggest that the scope of the problem was within boundaries that Slovenia can manage alone.

However, should the state be worse than it appears or should new risks arise, it cannot be excluded that Slovenia would have to turn to the European Stability Mechanism for aid in the coming years, he said.

The government was expected to review today the findings of the due diligence at state-owned NLB, the country's biggest bank, but Šušteršič announced that these were not available yet although the review was complete.

The minister reiterated that the government achieved its initial goal of stabilising the banking sector by providing fresh capital to NLB. Now it must attain its key objective - for banks to start financing business again, he added.

The recapitalisation conducted earlier in the week has ensured that NLB now meets capital adequacy demands, he said.

Admitting that the contingency scenario under which the capital injection was conducted with state funds was not what the government had planned, he said that it had no alternative after Belgium's KBC group, the second-largest owner, pulled out at the last moment.

"The main responsibility of the government is to provide for the stability of the banking system," he said in defending the use of state funds.

Slovenia now has a year to seek to secure private capital for NLB, Šušteršič added, emphasising that this would be a priority for the government in the coming months.

The minister also stressed that the government would work to see those responsible for the bad loans to be brought to account. While investments that soured due to the economic conditions will not be targeted, those that are the result of mismanagement and recklessness will.