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.
Slovenias banks are saddled with some 7 billion of bad loans, feeding concern over the governments financing capacity. Slovenias banking structure requirements will cost the government in the order of 8%-11% of GDP, according to Moodys.
Moodys 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 Moodys acknowledges that Slovenias government debt-to-GDP ratio remains among the lowest in the eurozone, where the average is approximately 93% of GDP. Slovenias 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, Slovenias debt burden is lower than two other Baa2 rated sovereigns, Brazil and Italy, which raises question marks over Moodys rating action. Slovenias relatively lower debt burden suggests that Slovenian debt, although rising, remains manageable.
Ales Pustovrh, managing director at Bogatin and one of ECRs expert contributors, notes: The most recent bond issuance was over-subscribed by four times; while some investors will be rattled by Moodys decision, most of them will not be, due to the risk appetite in Europe.
Reading Moodys decision, it strikes me that one of the reasons for their decision was their doubts that the government would be able to fulfil this years financing requirements, says Pustovrh.
S&P says Slovenias 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.
Moodys 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 countrys financing requirements and restructuring capabilities.