Slovenian Rating Cut by Moody’s, Another Downgrade Possible
Slovenia’s credit rating was cut one level by Moody’s Investors Service, the latest euro-region member to be downgraded in a sovereign debt crisis that forced Greece, Ireland and Portugal to seek financial assistance.
The local- and foreign-currency government bond ratings were lowered to Aa3, the fourth-highest level, from Aa2, Moody’s said in a statement today. It warned another reduction may come on concern the banking system will need state support as Europeans struggle to cut spending and boost economies.
Slovenia follows Italy, Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries to be downgraded this year as contagion from the region’s debt crisis prompts rating companies and investors to step up scrutiny of credit risk. Standard & Poor’s on Sept. 19 cut Italy 1 level to A, its first downgrade in five years, and Moody’s Investors Service will finish reviews on Italy and Spain in the coming weeks.
“Medium-term economic growth risks have developed due to the ongoing need for deleveraging in the highly indebted corporate sector,” Moody’s said in the statement. “The banking system’s significant vulnerabilities are another risk for the country’s economic growth outlook.”
The former Yugoslav republic was plunged into political turmoil after Prime Minister Borut Pahor’s Cabinet was toppled in a Sept. 20 vote that threatens to delay approval of the European Financial Stability Facility, the European Union’s rescue fund, meant to help Greece and other indebted nations stay afloat.
Political Turmoil
Moody’s said its review of Slovenia’s sovereign rating will focus on the government’s ability to achieve “ambitious fiscal consolidation targets and structural reforms” to stabilize and reverse public debt over the medium term. It said it will also analyze the effect of the current political uncertainty.
Pahor’s minority government was ousted after coalition partners left the ruling group over the pension overhaul and early elections that may now be held as early as December. Lawmakers are set to vote on the approval of the rescue fund on Sept. 27.
“The government isn’t surprised by the downgrade because it was itself warning of consequences of a failure to approve much needed structural reforms,” the Finance Ministry in Ljubljana said today in an e-mailed statement. “The government regrets that the pension overhaul was rejected in a referendum and that the no-confidence vote deepened the political uncertainty.”
‘Sound Economy’
Slovenia has a “sound economy,” capable of overcoming current challenges, the European Commission said today after the credit-score cut.
“We remain very confident in the capacity of the Slovenian economy to face these challenges in the coming months,” commission spokesman Olivier Bailly told reporters in Brussels today.
Nova Ljubljanska Banka d.d. needs 400 million euros ($541 million) of fresh capital, the second such move this year, to improve its capital ratio after Slovenia’s biggest lender barely passed an EU stress test in July, meant to show its ability to withstand another recession and a sovereign debt crisis.
The crisis “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” and “by the deterioration in banks’ profitability and asset quality with further potential negative impact on the economy,” Moody’s said.
Debt, Deficit Concerns
The government is the majority owner of the country’s two biggest lenders, Nova Ljubljanska and Nova Kreditna Banka Maribor d.d.
Central bank Governor Marko Kranjec, who’s also a member of the European Central Bank’s governing council, warned in May that Slovenia risks a ballooning budget gap and debt level, similar to what happened in Greece, Ireland and Portugal, if the country continues to help state-owned companies.
The government aims to narrow the gap to 4.6 percent of total output this year, or 5.5 percent by the European accounting standards, after lawmakers passed the reviewed budget spending on Sept. 16., the Finance Ministry said today. Slovenia’s public debt ballooned to 45.2 percent at the end of June, according to the statistics office data.
Market Reaction
The extra yield investors demand to hold Slovenia’s bond maturing in 2021 rather than similar-maturity German debt more than doubled since the pension changes were rejected in June.
The difference advanced to the highest on record to 333 basis points, or 3.33 percent at 1:37 p.m. in Ljubljana, compared with 147 basis points on June 6.
Nova Kreditna Banka plunged the most since the initial public offering in December 2007. The stock fell 11.7 percent to 4.15 euros, compared with 27 euros at the IPO and a high of 43.63 euros on Dec. 24 2007.
Slovenia’s credit-default swaps, which rise as the perception of creditworthiness deteriorates, rose to 248 basis points yesterday from 221 basis points, according to CMA, which compiles price quotes from dealers in the privately negotiated market.
The economy expanded 0.9 percent in the second quarter from a year earlier, down from 2.3 percent growth in the previous three months as demand for its exports in Europe waned. Banks’ reluctance to lend added to the slowing economy, according to EU and Development Minister Mitja Gaspari.
Finance Minister Franc Krizanic last week reduced his estimate for an expansion this year to 1.5 percent from a previous forecast of 1.8 percent.
To contact the reporter on this story: Boris Cerni in Ljubljana at bcerni@bloomberg.net
To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net
Rate this Page