Slovenia’s Credit Rating Cut By Fitch as Economy Sours

Slovenia’s sovereign-credit grade was cut by Fitch Ratings, which cited a worsening economic outlook and a widening budget deficit as the euro-area nation battles to rescue its banking industry and avoid a bailout.

The long-term rating was lowered one level to BBB+ from A-, on par with Ireland and Italy, Fitch said today in an e-mailed statement from London. The outlook was left at negative, meaning the ratings company is more likely to reduce its assessment further than leave it the same or raise it.

“The macroeconomic and fiscal outlook has deteriorated significantly since Fitch’s last rating review” in August 2012, it wrote. “The agency now forecasts a 2 percent contraction in real gross domestic product in 2013 and a decline of 0.3 percent in 2014, when Slovenia is expected to be one of only two euro-zone economies to contract.”

Slovenia, struggling with its second recession since 2009, 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. Moody’s cut the country’s credit to junk last month, citing the government’s bill for the bank rescue.

The yield on the government’s dollar note due 2022 was down 4 basis points at 5.33 percent as of 7:25 p.m. in the capital, Ljubljana. It peaked at 6.38 percent on March 27 as investors speculated Slovenia will be the next euro-area country to seek a bailout after Cyprus.

Limited Utility

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 government is preparing to sell state-company stakes beginning in September to raise cash, Finance Minister Uros Cufer said yesterday in an interview. The European Commission, the European Union’s executive, will assess an economic-overhaul plan from the Adriatic nation this month.

The fiscal deficit will widen to 5 percent of GDP this year from 4 percent in 2012, Fitch predicted today. That compares with a government goal of 2.8 percent.

“Fitch now projects that a larger general government deficit than previously expected, a poor macroeconomic outlook and costs deriving from bank recapitalization and the issuance of state guarantees for ‘bad bank’ bonds will cause gross general government debt to rise to 72 percent of GDP in 2013-14,” the ratings company said. “This compares with a forecast for 2014 of 63 percent when Fitch last downgraded Slovenia to A-in August 2012.”

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