Rating downgrade adds to Slovenia turmoil
by Daniel Mason
Slovenia's bond rating has been cut by Moody's Investors Service just days after its Prime Minister Borut Pahor's cabinet was toppled in a confidence vote.
Moody's lowered Slovenia's rating from Aa2 to Aa3 – and put it on review for a further downgrade. It said the decision was informed by risks that the government might have to provide additional support to banks, weakening medium-term growth prospects, and increasing political uncertainty.
In a statement the rating agency said: "The ongoing financial crisis has exposed significant vulnerabilities in the solvency and short-term external funding and overall business model of the Slovenian financial sector as evidenced by the banks' need for government support in the form of guarantees and capital injection."
Meanwhile a credit boom financed with short-term external bank borrowing, which was the driver of economic growth, led to "one of the highest debt-to equity ratios in the European Union construction and real estate corporate sector". This was on top of the "very open Slovenian economy's high exposure to the weakening global economic growth environment".
Plans for fiscal consolidation were also threatened by political risks, Moody's said. On 20 September Prime Minister Borut Pahor and his cabinet lost a confidence vote – a move which not only threw the country into political turmoil but might delay the approval of the EU's reinforced bail-out fund, which requires parliamentary ratification throughout the eurozone. An election could be held in December.
Slovenia, which has public debt of 45.2 per cent, plans to close its deficit to 4.6 per cent of total output – or 5.5 per cent by European accounting standards – this year. Growth of 0.9 per cent in the second quarter of the year was a significant slowdown compared with 2.3 per cent in the first quarter, partly due to falling demand for exports. The finance ministry has downgraded its growth forecast for 2011 to 1.5 per cent from 1.8 per cent.
While Slovenia has maintained relatively low government and household debt, as well as limited government refinancing risk, Moody's said any further reduction in the country's rating would be based on the government's "ability to achieve ambitious fiscal consolidation targets and structural reforms to generate substantial primary surpluses to stabilise and reverse the public debt trajectory in the medium term."