Slovenian Rating Cut to A- by S&P on Banking Bailout

Slovenia’s credit rating was cut to A- as the government’s announced support for state-owned banks will lead to higher-than-previously forecast debt, Standard & Poor’s said.

The rating was reduced from A, S&P said in a statement late yesterday. The outlook on the nation’s long-term rating is stable. The A- assessment is on a par with Poland and Malaysia.

“The downgrade reflects Slovenia’s higher-than-anticipated debt burden, due to its announced support of its state-owned banks,” S&P said in the statement. “We also observe rising policy-implementation risks to resolving economic and fiscal pressures.”

Slovenia, on the brink of becoming the sixth euro member to ask for a bailout, has drafted a 4 billion-euro ($5.4 billion) bank recapitalization plan that would take up bad loans from ailing lenders. The proposal may be derailed by early elections as a political crisis deepens over corruption allegations against Prime Minister Janez Jansa.

The yield on the nation’s dollar-denominated debt maturing in 2022 dropped 9 basis points from yesterday to 5.049 percent at 12:33 p.m. in Ljubljana, according to data compiled by Bloomberg.

Debt Increase

Slovenia’s public debt rose to about 48 percent of gross domestic product last year from 16 percent in 2008, a year after the former Yugoslav nation adopted the euro. Government support of the state-controlled banks at the level likely to be needed will increase the debt ratio to 59 percent at the end of 2013, S&P said.

The Adriatic nation’s largest state-controlled banks, including Nova Ljubljanska Banka d.d. and Nova Kreditna Banka Maribor d.d., will probably report a fourth consecutive year of losses as a wave of bankruptcies increases the level of bad loans. Non-performing loans surged to 7 billion euros, or 14.4 percent of all loans at the end of November, according to the central bank.

“Institutional weaknesses will probably be exacerbated by Slovenia’s sizable direct and indirect equity stakes in the real economy, which amplify political polarization,” S&P said in the statement. “We also take the view that vested interests that benefit from long-entrenched entitlements or other forms of rent-seeking related to Slovenia’s political cycles drag on the pace and effectiveness of structural reforms.”

Government Measures

Jansa’s Cabinet, which took power a year ago after an early vote following the collapse of the previous government, passed legislation on the bank recapitalization plan, as well as the creation of a sovereign holding and pension changes that are meant to make the economy more competitive and pull it out of its second recession in three years.

The prospect of early elections increased after one of Jansa’s coalition partners, the People’s party, said last night that it will support a no-confidence vote in the Cabinet and decided that it won’t be part of a technocrat administration that is being pushed by the largest opposition group.

Slovenia’s general government deficit, excluding the announced capital boost for banks, will decrease to around the government’s target of 3 percent of GDP by the end of the year, the ratings company estimates, from just over 4 percent at the end of 2012 and 6.4 percent in 2011.

Along with more changes to the pension system, S&P said “that reforms to the health-care system and labor market could help create a more flexible economy, improve medium-term employment prospects, and reduce pressures on Slovenia’s social security system.”

After the cut, S&P’s rating of Slovenia is equivalent to that of Fitch Ratings, while Moody’s Investors Service rates the country at Baa2, the second-lowest investment grade.

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