Slovenia Credit Rating Cut to Junk by Moody’s on Banking Turmoil

Slovenia’s credit rating was cut to junk by Moody’s Investors Service, which cited “turmoil” in the country’s banking industry and said the government would have to offer lenders more financial support.

The rating was lowered two levels to Ba1 from Baa2, on par with Turkey, Moody’s said today, assigning a negative outlook. Five members of the 17-nation euro area are now rated junk by Moody’s. Standard & Poor’s and Fitch Ratings both rate Slovenia at A-, the fourth-lowest investment grade.

“The first key factor underpinning today’s rating action is the ongoing turmoil in the country’s banking system and the high likelihood that the sovereign will be required to provide further assistance and capital injections,” Moody’s said in an e-mailed statement from New York. “Asset quality at the banks deteriorated considerably in 2012 and has continued to deteriorate since.”

Slovenia, which before the rating action was on course to sell dollar-denominated benchmark bonds, is struggling with its second recession since 2009. The government is working to fix its ailing banking industry with a 900 million-euro ($1.2 billion) capital boost and the creation of a so-called bad bank to cleanse lenders’ balance sheets and aid economic recovery. A detailed overhaul plan is set to be presented to the European Commission in Brussels by May 9.

Bond-market history indicates that the utility of sovereign ratings may be limited. Almost half the time, yields on government bonds fall when a rating action by S&P and Moody’s suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.

The yield on the government’s dollar note due 2022 rose two basis points to 5.66 percent at 6:55 p.m. in Ljubljana.

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