bne -

A second member of Slovenia's coalition announced on February 5 that it plans to leave the government over the corruption scandal engulfing Prime Minister Janez Jansa. The move will reduce the number of seats held by an administration that slipped into minority last month still further, and pushes the country closer to a change of government or early elections.

In a widely anticipated move, pensioners' party Desus said that it will leave the coalition on February 22. Party head Karl Erjavec, also the current foreign minister, said in the wake of a board meeting, that Desus is already in talks with the opposition on nominating a new prime minister.

Jansa's conservative alliance lost its majority in parliament in January when Civic List and its two cabinet ministers quit. That left it with the support of just 36 MPs in the 90-seat parliament. The decision bt Desus deprives the PM of a further 6 seats, making it that much more difficult for him to remain in office.

However, with the opposition still struggling to put a rival coalition together, and Jansa seemingly happy to tough it out in a minority capacity, Tim Ash of Standard Chartered predicts "this could all drag on for some time." Yet that would be disaster for a struggling economy in desperate need of strong leadership to put it back on track and avoid becoming the next Eurozone country to require a bailout.

Slovania has been back in recession since 2011, with the country's - mostly state-controlled - banks crumbling under bad loans worth about 19% of annual GDP. This week, data showed that the proportion of loans now considered non-performing (NPL) in the first none months of 2012 grew 14.2% of the total, representing almost €7bn in bad debt. While the proportion of NPLs at foreign owned banks is stable, it's rising at the state banks.

Measures to try to halt the slide, such as creating a "bad bank" or labour market reform, are now under threat from the political crisis. This has analysts like Ash warning that Slovenia faces potential credit rating downgrades, just as the country needs to mull issuing fresh debt on the international markets as its cash buffer erodes.

The political crisis also threatens to disrupt the EU accession of Croatia, set for July. Ljubljana has yet to ratify its neighbour's entry because the two countries are still locked in a banking dispute that dates back to the collapse of the former Yugoslavia in the 1990s.

Erjavec hinted that issue may have pushed Desus to try to speed the process, announcing hopes that by the time he resigns on February 22, parliament will have ratified the treaty. "I fear that if the treaty is not ratified by then, it will be very hard to ratify it in time," he said. The foreign minister is set to meet Croatian counterpart Vesna Pusic for talks on February 6.