Frankfurt, 23 December (STA) - Global rating agency Moody's downgraded Slovenia's government bond ratings by a notch from Aa3 to A1 on Thursday due to expectations that the government will have to help recapitalise banks and fears over growth prospects. This is Slovenia's second downgrade from the agency in three months.
Frankfurt-based Moody's Investor Services said in a statement late on Thursday that concerns that recapitalisation will further dent the Slovenian government's balance sheet in a time of economic uncertainty prompted its decision.
The agency said the downgrade was also brought about by increased risk "posed by the sustained deterioration in government funding conditions due to the euro area sovereign debt crisis".
The downgrade completes a review of Slovenia's sovereign debt rating started on 23 September, when the agency first downgraded Slovenian government bonds by a notch from Aa2 to Aa3.
The agency added in its latest statement that the rating has been put on a negative outlook, meaning further downgrades are possible if the risk factors prompting this downgrade deepen.
In its latest downgrade, Moody's says that undermined asset quality and the ongoing eurozone debt crisis have "further exposed significant vulnerabilities in the solvency and short term external funding and overall business model" of Slovenia's largest banks.
It expects that the government will therefore have to provide further support, potentially significant in size, to the banks.
Adding to the concerns is that economic slowdown and the risk of recession next year will add to the deterioration of asset quality at Slovenia's largest banks, meaning that bad loans may reach 20% of all loans by the end of 2012.
The agency therefore assesses that the government injections to prop up the financial sector could amount to 2-8% of GDP over the coming years.
Moody's says that Slovenia's small and open economy faces significant mid-term risks to growth. It puts this down to general deleveraging in the eurozone and the adjustments underway in "Slovenia's highly leveraged corporate sector, particularly in the construction sector".
Moreover, it also highlights the current lack of a full-fledged government in the country, assessing that the uncertain political majorities following the recent snap poll "point to some challenge for the formation and stability of a new government coalition which in turn may...delay reform measures".
While admitting that Slovenia's budget refinancing risk appears to be low for 2012 as the recent sale of treasury bonds and its cash reserves should suffice for next year, the agency fears that "the highly volatile funding conditions on the euro area bond markets represent additional risks...in the event that financing needs exceed the original estimates".