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Slovenia Put on Credit Watch Negative by S&P on Vote Call

Slovenia’s credit rating was put on credit watch negative by Standard & Poor’s because of opposition efforts to force a referendum on the government’s plan to overhaul the economy.

Opposition lawmakers on Oct. 30 filed a motion to call a plebiscite on a so-called bad bank and the creation of a wealth fund meant to ease the sale of state assets. The bank plan motion was rejected by Parliamentary Speaker Gregor Virant on Nov. 2. The yield on Slovenia’s 10-year $2.25 billion bond rose 4 basis points, after soaring 29 basis points on Oct. 31.

“The possibility that the parliamentary opposition will use the referendum procedure as a blocking device raises significant uncertainties that could threaten the government’s ability to develop and execute structural reform policies,” New York-based S&P said in a statement today. “Delays in resolving the issue will likely harm investor confidence and could increase Slovenia’s financing costs.”

Slovenia is pushing ahead with measures to strengthen the economy, including fiscal consolidation and the formation of the bad bank as the government struggles to avoid becoming the next euro-region country to ask for international assistance.

Lawmakers in the capital Ljubljana will today ask the Constitutional Court to either allow or reject the call for the popular vote, Finance Minister Janez Sustersic said yesterday.

The 10-year bond sold last month dropped after the report, pushing the yield up seven basis points to 5.51 percent at 10:30 a.m. in Ljubljana, after rising to 5.49 percent on Oct. 31, according to data compiled by Bloomberg.

Credit Score

S&P said it may lower Slovenia’s credit score by one level to A-, its fourth-lowest investment grade, or to BBB, two steps above junk, “if the government’s ability to enact key reforms to promote a more flexible and responsive economy and financial markets have been weakened and if we see that the lack of political certainty is undermining Slovenia’s other credit metrics such as its fiscal and debt dynamics.”

A BBB rating would put the country on par with South Africa, Lithuania and Bulgaria. A possible downgrade to BB+, the first non-investment grade, would disqualify 80 percent of Slovenian bank assets held as collateral at the European Central Bank, the Finance Ministry said.

“A credit rating cut would also mean that state-backed bonds that would be issued in exchange for bad loans from banks couldn’t be used as collateral with the ECB to ensure their liquidity,” it said in an e-mailed statement.

Bank Plan

Slovenia’s bank-stabilization plan foresees the creation of an agency that would take non-performing loans from ailing lenders amounting to as much as 4 billion euros ($5.1 billion) in exchange for state-backed bonds that would probably be eligible as collateral for further financing with the ECB, Finance Minister Janez Sustersic has said.

The Adriatic nation’s export-driven economy, which contracted an annual 3.2 percent in second quarter, will probably shrink more than 1.8 percent because of “uncertainty on the sovereign debt markets and the need for additional fiscal consolidation measures in the European Union,” the central bank said today in a price stability report.

“In the second quarter of this year, the economic situation in Slovenia deteriorated sharply,” Banka Slovenije said in the report. “The risks in GDP growth projections remain high and are tilted toward the downside.”

The government of Prime Minister Janez Jansa is aiming to cut the budget deficit to about 3.5 percent of gross domestic product from 6.4 percent at the end of last year. Debt is forecast to increase to 58 percent of total output next year, according to the European Commission.

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