Slovenia’s credit rating was on Tuesday downgraded to junk by Moody’s rating agency, forcing the tiny eurozone state, which is battling to avoid an emergency bail out, to stall plans for raising debt in US dollar markets.
Moody’s said it was lowering the Alpine country’s rating from Baa2 to Ba1 because of the weak state of its banking system, deteriorating public finances and increased chance of requiring an international rescue. It kept the country on “negative outlook”, meaning a further downgrade is possible.
“There is increased probability that external support, external assistance will be required,” warned Yves Lemay, managing director for European sovereigns at Moody’s.
Despite its small size – its population is just 2m – Slovenia has attracted the attention of financial markets amid fears that the country will become the sixth eurozone member to require European financial support.
Moody’s announcement interrupted an investor roadshow for a planned issue of US dollar denominated bonds, which Slovenia’s newly-elected government hopes will avoid the country having to seek external help.
However, Slovenia’s fundraising may not be blown off course by Moody’s as the kind of investors interested in the country’s debt are less likely to be influenced by rating actions and will treat the country as similar to emerging market debt. The country’s escalating financial difficulties were also well-known.
Mr Lemay said: “While the government may continue to be successful in tapping the market, the rating action today is influenced by concern that there is an increased probability that at some time, funding will be more difficult in the market.”
Moody’s said asset quality at Slovenia’s banks “deteriorated considerably” in 2012 and was expected “to continue to deteriorate given the weak economic environment”. The country’s economy contracted by 2.3 per cent last year as a result of the banking crisis, and Moody’s is forecasting a further 1.9 per cent contraction in 2013.
The rating agency warned that delays addressing problems in the banking sector “suggest that the sovereign remains heavily exposed to contingent liabilities”. Bank recapitalisation costs were put at between 8 per cent and 11 per cent of gross domestic product.
Slovenia’s fiscal debt burden remained among the lowest in the eurozone but “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,” said Moody’s.
It added: “Risks to bondholders have increased and the sovereign’s cost of funding is likely to be prone to volatility.”
Slovenia has mandated Deutsche Bank, JPMorgan and BNP Paribas to arrange its investor roadshow, which started last month (April) in Washington.
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