Slovenia Political Risk May Harm Overhaul, Moody’s Says

Slovenia’s political crisis is increasing the risk that an economic overhaul may suffer a setback, Moody’s Investors Service said.

Slovenia plunged into political uncertainty after the anti-corruption agency accused Prime Minister Janez Jansa of failing to declare all his private assets, prompting his coalition partners to demand his resignation and increasing the prospect of an early vote. Regular elections are planned for 2015.

The corruption allegations against Jansa are increasing the political risk ahead of the creation of a so-called bad bank after the administration passed the budget for this year and next, adopted pension changes and created a sovereign wealth fund, Jaime Reusche, assistant vice president at the Sovereign Risk Group at Moody’s in New York, wrote in a report yesterday.

“Heightened political risk adds uncertainty to the implementation of the planned measures to stabilize the economy and could result in stop-and-go policies on the fiscal and reform front,” Reusche said. “If the coalition were to lose power in parliament, policy effectiveness would be jeopardized and would result in a disruptive political transition.”

Moody’s sees the bad bank creation as the most important move to stabilize Slovenia’s financial industry even though implementation risk “remains high,” according to the report.

Bad Loans

The government agency that would take up bad loans from lenders such as Nova Ljubljanska Banka d.d. in exchange for government-guaranteed bonds of as much as 4 billion euros ($5.4 billion) is expected to be set up by April, Moody’s said.

The guarantees would represent 10.9 percent of the Adriatic nation’s gross domestic product and would increase the sovereign-debt burden to around 60 percent of total output from 46.9 percent at the end of 2011, Moody’s said. Reusche estimates the economy to shrink 1.6 percent this year.

The company rates Slovenia at Baa2, the second-lowest grade in the investment category.

“The risk of the sovereign petitioning for international assistance remains low, supporting the investment grade rating,” Reusche said. “Risks are clearly tilted toward the downside and are already captured by the negative outlook.”

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