Slovenia: Moody’s dubious rating decision divides opinion


Matthew Turner
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At junk status, Moody’s rates Slovenia four notches lower than Fitch and S&P. This is one of the most divergent eurozone sovereign credit opinions – and markets continue to treat the sovereign as effectively investment grade.

Slovenia’s ailing banking sector and mounting debt burden resulted in Moody’s downgrading the sovereign by two notches to Ba1 with a negative outlook from Baa2 on Tuesday. The downgrade means Slovenia is no longer considered investment grade, according to Moody’s.

Slovenia’s banks are saddled with some €7 billion of bad loans, feeding concern over the government’s financing capacity. Slovenia’s banking structure requirements will cost the government in the order of 8%-11% of GDP, according to Moody’s.

Moody’s cites 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” as a key factor underpinning its decision.

The agency also highlights “the substantial increase in Slovenia's government debt metrics. Slovenia 's general government debt at the end of 2012 reached an estimated 54.1% of GDP, up from 22% in 2008.”

On the other hand Moody’s acknowledges that Slovenia’s government debt-to-GDP ratio remains among the lowest in the eurozone, where the average is approximately 93% of GDP. Slovenia’s gross government debt rose to 52.6% of GDP in 2012, from 46.9% in 2011 and is forecast to reach 68.8% in 2013, according to the IMF World Economic Outlook report.

Indeed, Slovenia’s debt burden is lower than two other Baa2 rated sovereigns, Brazil and Italy, which raises question marks over Moody’s rating action. Slovenia’s relatively lower debt burden suggests that Slovenian debt, although rising, remains manageable.


Furthermore, Slovenia’s fiscal firepower appears intact. The sovereign managed to successfully issue a $1 billion five-year bond, paying a 4.95% yield, and a $2.5 billion 10-year paying a 6% yield on Thursday, reflecting the high-yield appetite for sovereign debt.

Ales Pustovrh, managing director at Bogatin and one of ECR’s expert contributors, notes: “The most recent bond issuance was over-subscribed by four times; while some investors will be rattled by Moody’s decision, most of them will not be, due to the risk appetite in Europe.”

“Reading Moody’s decision, it strikes me that one of the reasons for their decision was their doubts that the government would be able to fulfil this year’s financing requirements,” says Pustovrh.

Slovenia’s efforts to finance the recapitalisation of the country’s state-owned banks through the issuance of five- and 10-year benchmarked sized bonds, led to S&P affirming the country’s A-rating with a stable outlook.

S&P says Slovenia’s ability to meet its funding needs meant there was no need to change its view. “The government's five- and 10-year bonds, combined with Slovenia's €1.1 billion 18-month treasury bill sale on April 17, and the US$2.25 billion 10-year bond issued in October 2012, will more than meet its €3.2 billion borrowing requirement for 2013.”

Moody’s now rates Slovenia four notches lower than Fitch and S&P – one of the most divergent eurozone sovereign credit opinions. But ECR analysis has long pointed to the more positive view on the country’s financing requirements and restructuring capabilities.

Analysts participating in the ECR survey rate Slovenia higher other Baa2 sovereigns covered by Moody’s. This raises the question of whether Moody’s was right to strip Slovenia of its Baa2 rating.

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