Slovenia’s downgrade by Moody’s Investors Service, which said its struggling banks will need government funding, increases the likelihood that the Adriatic nation will become Europe’s sixth bailout victim. Standard & Poor’s cut its debt grade today.
Moody’s lowered the rating three levels to Baa2, two levels above investment grade, and maintained its negative outlook. S&P cut the rating to A, five steps below the top investment grade, from A+, assigning a negative outlook that indicates it’s more inclined to trim its assessment further than raise it or leave it unchanged.
“The likelihood of support being needed is very high,” Jaime Reusche, a New York-based Moody’s analyst, said in the statement. “This potential additional debt burden comes at a time when the government is already facing significant challenges in its efforts to consolidate its fiscal position.”
Slovenia may become the sixth euro-region member after Greece, Ireland, Portugal, Spain and Cyprus to require a rescue as the 17-nation currency area grapples with a deepening debt and banking crisis. The nation’s biggest banks -- Nova Ljubljanska Banka d.d., Nova Kreditna Banka Maribor d.d. and Abanka Vipa d.d. -- rely on the European Central Bank for liquidity and had their deposit ratings cut by Moody’s on July 25 as their bad loans continue to climb.
The yield on Slovenia’s 4.375 percent bond maturing in January 2021, surged 41 basis points, or 0.41 percentage point, to 7 percent at 7:08 p.m. in Ljubljana, according to data compiled by Bloomberg News.
Political risks to the implementation of an economic overhaul and deteriorating asset quality at banks have contributed to “financial sector external funding contracting sharply, government funding costs increasing, and the domestic economy weakening,” S&P said today in a statement.
Funding costs are increasing because of Slovenia’s growing reliance on “shorter-term issuance” and domestic banks, Moody’s said late yesterday. The country’s three largest lenders may need a capital injection equal to as much as 8 percent of the country’s gross domestic product, Moody’s said.
The Slovenian government “deeply regrets” the downgrade “as the rating company hasn’t taken into account measures that have been undertaken to consolidate public finances,” the Finance Ministry said in an e-mailed statement. “Slovenia, considering its budget gap and public debt, cannot be compared with Spain, Italy or Greece and the banking sector isn’t as big as in Spain.”
Slovenia “at the moment” has no need to ask for assistance from the EU and “isn’t exposed to refinancing risks” with funding sufficient to finance the budget until year-end “even with increased market uncertainties,” the ministry said today.
The government of Prime Minister Janez Jansa has pledged to cut spending this year by 800 million euros ($990 million) and narrow a budget deficit that swelled to 6.4 percent of GDP last year. The 2012 deficit goal is 3.5 percent, Moody’s said.
“Continued weakness in the economy could hinder the achievement of these targets,” the rating company said. “Additional capital injections into the banking system could materially affect the country’s deficit trends.”
Slovenia’s export-driven economy is teetering on the brink of a second recession in three years as demand for its goods in Europe fades amid a crisis that has threatened to rip apart the single-currency region since its start in Greece in late 2009.
“The prospect for an International Monetary Fund and EU bailout depends much more heavily on how events pan out in the euro zone,” William Jackson, an emerging-markets economist at Capital Economics in London, said by phone. “If we see another substantial flare up in tensions, then the Slovenian government could find borrowing on the markets is prohibitively costly.”
Slovenia’s five-year credit default swaps were at 424 basis points today, according to data compiled by Bloomberg, after reaching a record high of 434 basis points on July 9. The derivatives are used by investors to speculate on the country’s ability to repay debt. Romania’s CDS were at 415 basis points while Hungary’s stood at 460 basis points, data show.
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