Bloomberg News

Fitch Lowers Slovenia’s Rating One Step on Banking Concerns

September 28, 2011

Sept. 29 (Bloomberg) -- Fitch Ratings cut Slovenia’s long-term foreign- and local-currency ratings one step because of risks to banking stability and a worsening fiscal position in the euro-area nation.

The Alpine country’s rating was lowered to AA- from AA, the fourth-highest investment grade, Fitch said yesterday in a statement in London. That’s the same as Italy and leaves Slovenia as the highest-rated country among the European Union’s eastern members. The outlook is negative, indicating Fitch is more likely to cut its rating than increase it or leave it unchanged.

The downgrade “is primarily driven by deterioration in the financial position of the banking sector, which poses a significant risk that the sovereign will need to contribute to future recapitalization,” Chris Pryce, a director at Fitch’s sovereign-ratings department, said in the statement. Defeat of a pension overhaul at a June referendum is “a setback for the long-term sustainability of the public finances,” he added.

Slovenia, a euro member since 2007, follows Italy, Spain, Ireland, Portugal, Cyprus and Greece as euro-area countries to be downgraded this year as contagion from the region’s debt crisis prompts rating companies and investors to step up scrutiny of credit risk. Moody’s Investors Service cut the Alpine nation’s credit rating by one level to Aa3 on Sept. 23, citing “medium-term economic growth risks.”

The yield on Slovenia’s Eurobond due 2018 increased to 4.53 percent yesterday from 3.94 percent Sept. 19, the day before lawmakers ousted Prime Minister Borut Pahor’s government after two parties left the Cabinet in a dispute over pension changes. Slovenian President Danilo Turk yesterday said he will call early elections for Dec. 4.

Non-Performing Loans

Fitch said its downgrade reflects concern about the level of non-performing loans at banks, which were equal to 14.8 percent of total loans at the end of June, as well as the low level of provisioning against them and capital adequacy.

Assuming an increase in delinquent loans to 18 percent and a 50 percent writedown of equity holdings, banks would require 3.1 billion euros ($4.2 billion) of additional capital, according to Fitch’s baseline scenario.

Nova Ljubljanska Banka d.d. is in line for 400 million euros in new capital, the second such move this year, to improve its capital ratio after Slovenia’s biggest lender barely passed an EU stress test in July, calling into question its ability to withstand another recession and a sovereign-debt crisis in the region.

The government is the majority owner of Nova Ljubljanska and Nova Kreditna Banka Maribor d.d., the country’s second- largest lender.

Growth Forecasts Cut

Slower growth in the euro region increases the downside risks to Slovenia’s economy and public finances, Fitch said. The ratings company cut its growth projections to 1.5 percent this year from 2.5 percent and to 2 percent in 2012 from 3 percent.

Still, the banking industry represents the main risk to Slovenia’s debt rating, according to Fitch, which affirmed the nation’s F1+ short-term foreign-currency issuer default rating and AAA country ceiling ratings.

“Greater than anticipated further increases in non- performing loans and recapitalization requirements in the banking sector could lead to further negative rating action,” it said. “A failure of the government to provide timely support, if required, would also be negative. Material fiscal slippage” may also trigger a downgrade, it added.

--Editors: Kevin Costelloe, Gail DeGeorge

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Vivek Shankar at vshankar3@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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