By Nick Mann | 1 May 2013
Moody’s has downgraded Slovenia's credit rating to 'junk' status, warning that ongoing banking turmoil and rapidly increasing public debt meant the country might need a bailout.
The ratings agency announced overnight that it had cut its rating on the Alpine nation’s sovereign debt from Ba1 to Baa2. This means Moody’s believes there is a risk the country could default on its debt obligations. The agency maintained its negative outlook on the rating.
Slovenia’s debt has risen substantially from 22% of gross domestic product in 2008 to an estimated 54.1% at the end of 2012, Moody’s said. While this still remains among the lowest in the eurozone, it is expected to continue to move up beyond 65% and Moody’s said it was unsure where it would peak.
‘The level at which debt metrics for Slovenia will peak is very uncertain and will depend in part on whether the government will need to provide further assistance to the banking system,’ it explained. ‘The level will also depend on the new government's fiscal targets, which are likely to be less ambitious than the previous government's targets, and on the macroeconomic outlook.
‘Risks are skewed negatively and debt levels could exceed 70%–75% of GDP after the banking system's issues have been resolved, but are unlikely to reach unsustainable levels. Nevertheless, risks to bondholders have increased and the sovereign's cost of funding is likely to be prone to volatility.’
Slovenia is also facing ‘ongoing turmoil’ in its banking system, Moody’s said. Around 20% of the loans made by its largely-state owned banking sector were classed as ‘non-performing’ at the end of 2012, which means they are either in, or close to, default.
Moody’s expects this situation to worsen. Slovenia’s economy shrank by 2.3% last year and Moody's forecasts it will contract by 1.9% this year before growing by just 0.2% in 2014.
The Slovenian government has already provided a bailout for the banking system, and this economic outlook means there is a ‘high likelihood’ it will have to provide further capital injections.
Despite relatively successful recent attempts to raise finance on the global markets, Moody’s also noted that Slovenia faced an ‘uncertain’ funding environment, making a full-scale international bailout increasingly likely.
‘The sovereign's cost of funding remains elevated and sensitive to financial market confidence,’ it explained. ‘Slovenia's vulnerability to external shocks, like those brought about by the crisis in Cyprus, could make it difficult for the sovereign to fund itself at sustainable rates, which increases the likelihood that authorities would need to request an external assistance programme.'
