Slovenia rating cut on euro crisis fears

Slovenia's credit rating was cut last night by Moody's, because of the impact of the eurozone crisis and the possibility that the government might have to provide further support to under-capitalised banks. Meanwhile, Moody's maintained its current ratings on Denmark, Austria, Romania and Slovakia.

In a statement, the rating agency said the "first driver" for its decision to downgrade Slovenia from Aa3 to A1 was uncertainty in a banking sector with assets totalling 136 per cent of gross domestic product. It added that the eurozone debt crisis and resulting pressures on bank assets "further exposed significant vulnerabilities in the solvency and short-term external funding and overall business model of the largest institutions in Slovenia's financial sector". The government would have to step in to provide "significant" support, Moody's predicted.

Increased medium-term risks to growth were also cited, along with the political "challenges for the formation and stability of a new government coalition which in turn may complicate and delay economic and fiscal reform measures". On December 4 the centre-left Positive Slovenia party won a surprise election victory but without enough seats to rule on its own. Moody's said that government refinancing risks should be "kept at bay" for 15 months but warned of the dangers of volatile euro area bond markets. It gave Slovenia's rating a negative outlook, leaving open the possibility for a further downgrade in the coming months.

On December 6 rating agency Standard & Poor's warned that all six of the eurozone's triple-A rated sovereigns – Germany, France, Austria, Luxembourg, Finland and the Netherlands – could lose their top score. But today Moody's said that its own top-notch rating of Austria, along with that of non-euro member Denmark, was secure with a stable outlook. Austria's "high economic strength" thanks to a skilled labour force, competitive export sector and diversified economy allowed it to grow faster than the European average in recent years. But, Moody's cautioned that without resolution the euro crisis would increasingly affect core members such as Austria.

On Denmark, the rating agency said its top-notch score was stable but the economy's long-term economic strength was "less impressive" given weak growth over the last decade. "An ageing population and a decline in North Sea oil and gas revenues will further constrain growth unless structural adjustments are undertaken to address productivity and competitiveness challenges," Moody's said, adding that the "generous" welfare system was becoming less affordable. Today Moody's also maintained Romania's Baa3 rating, and Slovakia's A1 score.