LJUBLJANA, Slovenia (AP) — Moody's rating agency has downgraded Slovenia's government bond rating by three notches — to just two above junk — due to concerns about the country's troubled banks and rising borrowing costs.
The agency said the rating was reduced from A2 to Baa2 because of the funding challenges the government faces and "substantial" risks to the small European country's financial system.
Moody's added that "the deteriorating macroeconomic environment" in Slovenia, first ex-Communist country to adopt the euro, "opens the possibility that external assistance may be required."
The U.S. agency believes that the three banks are likely to require capital support in the range of 2 percent to 8 percent of GDP.
"The likelihood of support being needed is very high," Moody's said in a statement, adding that a further negative outlook is likely.
Slovenia's banking sector notched up its third successive year of losses in 2012. The country's three biggest banks are now calling for injections of capital by the state. The debt crisis has led to a freeze on bank lending, particularly affecting the construction and financial services.
Moody's noted that a potential additional debt burden comes at a time when the government is already facing significant challenges in its efforts to consolidate its fiscal position.
The general government deficit in 2010 was 6% of GDP in 2010 and despite consolidation efforts that brought the deficit close to 5% of GDP, capital transfers of 1.3% of GDP pushed the deficit to 6.4% for 2011. The center-right government is targeting a general government deficit of 3.5% of GDP in 2012 and for 2013 it expects to reduce the imbalance to 2.5% of GDP, Moody's said.
"However, continued weakness in the economy could hinder the achievement of these targets," Moody's added. "Finally, additional capital injections into the banking system could materially affect the country's deficit trends."