New York, August 02, 2012 -- Moody's Investors Service has today downgraded Slovenia's
government bond rating to Baa2 from A2, and has maintained the negative
outlook.
The decision to downgrade Slovenia's sovereign rating reflects the
following key factors:
1) The Slovenian banking system's need for further recapitalisation
is increasing the risk of further contingent liabilities crystallising
for the sovereign.
2) The Slovenian government's cost of funding is increasing and
its market access is becoming more constrained, as illustrated by
its increased reliance on shorter-term issuance and its growing
dependence on funds from its domestic banks, which in turn are increasingly
reliant on ECB liquidity support.
3) The Slovenian economy's continued weakness and rising vulnerability
to shocks given its reliance on trade and the weakness of the corporate
sector, which are exacerbating the government's fiscal challenges
and efforts to stabilise its debt metrics.
The negative outlook reflects Moody's view that the sovereign's
funding challenges and risks from the financial system remain substantial.
The deteriorating macroeconomic environment amplifies this risk and opens
the possibility that external assistance may be required.
RATIONALE FOR DOWNGRADE
--FIRST DRIVER: BANKING SYSTEM'S NEED FOR FURTHER
RECAPITALISATION
The main driver underlying Moody's decision to downgrade Slovenia's
sovereign rating is the country's challenged banking system and
the consequently increased likelihood of further contingent liabilities
crystallising for the sovereign. Specifically, the banking
system is likely to face increases in non-performing loans on its
books. Moody's notes that the government's ability
to take on further debt to finance any further recapitalisation is increasingly
constrained given the material deterioration in its debt metrics in recent
years, and the support it has already provided to the banking system.
This includes the capital support provided by the government to the country's
largest lender, Nova Ljubljanka banka (NLB, rated B2/NP/E
negative), of close to 1% of GDP in June 2012 given that
no private-sector solution could be found.
Moody's believes that NLB, Nova Kreditna banka Maribor (NKBM,
B3/NP/E negative) and Abanka Vipa (Caa1/NP/E negative), the country's
three-largest banks, are likely to require capital support
in the range of 2% to 8% of GDP depending on the severity
of their asset-quality deterioration. The likelihood of
support being needed is very high (Please refer to Moody's press
release entitled "Moody's downgrades three Slovenian banks;
outlook negative", published on 25 July 2012).
Moody's notes that this potential additional debt burden comes at
a time when the government is already facing significant challenges in
its efforts to consolidate its fiscal position. The general government
deficit came in at 6% of GDP in 2010 and despite consolidation
efforts that sought to bring the deficit close to 5% of GDP in
2011, capital transfers of 1.3% of GDP pushed the
deficit to 6.4% for the year. These transfers were
capital injections into loss-making state-owned enterprises
(SOEs) and guarantees of the obligations of these SOEs, including
an injection of 0.7% of GDP into NLB. For 2012,
the government is targeting a general government deficit of 3.5%
of GDP and for 2013 it expects to reduce the imbalance to 2.5%
of GDP. However, continued weakness in the economy could
hinder the achievement of these targets. Finally, additional
capital injections into the banking system could materially affect the
country's deficit trends.
--SECOND DRIVER: RISING FUNDING COSTS AND CONSTRAINED
MARKET ACCESS
The second driver underpinning the decision to downgrade Slovenia's
sovereign rating is the government's rising cost of funding,
and its increasingly constrained financial market access. As a
result of increasingly adverse market conditions this year, the
government has had to shift the composition of its funding mix towards
a greater reliance on shorter-term issuance and loans, rather
than the typical issuance pattern of meeting most of its borrowing requirements
through bond placements. Moody's believes that weakened demand
for Slovenian longer-term securities are preventing the sovereign
from tapping the markets, with the exception of short-term
paper which the domestic market is more willing to buy. Moreover,
the composition of its short-term funding has also shifted towards
shorter maturities as the amount of securities with a maturity of less
than one year has increased. Moody's notes that the government's
liquidity position benefits from a significant cash balance deposited
with the domestic banks due to its prefunding strategy in 2011.
However, significant drawdown on these deposits to finance its deficit
would likely affect the banks' liquidity position, which would
also cause lending activities to contract and hinder economic growth.
--THIRD DRIVER: CONTINUED WEAK ECONOMIC CONDITIONS
EXACERBATING FISCAL CHALLENGES
The third driver of Moody's rating action on Slovenia is the economy's
continued weakness and its limited resilience to shocks, which are
exacerbating the government's weakening financial strength and debt
metrics. While the Slovenian economy is well-developed,
with some specialisation in production of intermediate capital goods,
it is relatively small and fairly concentrated, with a high reliance
on exports, over 70% of which are destined for EU nations.
Moreover, the range of product categories remains undiversified.
The economy once again fell into recession in 2011 when output contracted
by 0.2%, and Moody's expects the situation will
worsen in 2012 with a larger decrease in economic activity of 2%.
While in normal conditions the economy would be strong enough to withstand
a temporary downturn, in the current environment the recession assumes
a far greater significance, as it implies increasing asset impairments
for the already weak banking sector and hinders the government's
efforts to demonstrate its fiscal credentials and retain the confidence
of investors.
Moody's believes that the country is at increasing risk of a financial
shock. A banking system reliant on foreign funding, over-indebted
corporates, a fragile construction sector, decreased cost-competitiveness
and an enlarged deficit in the net international investment position,
all suggest that Slovenia's adjustment process will be protracted
and vulnerable to further deterioration in external conditions,
causing significant uncertainty over the likely drivers of growth generation
in the coming years.
WHAT COULD MOVE THE RATING UP/DOWN
Slovenia's government debt rating could be downgraded further in
the event there is additional material deterioration in the country's
economic prospects or a further deterioration in funding conditions as
a result of new, substantial domestic economic and financial shocks
from the euro area crisis or the banking sector. Should Slovenia's
access to public debt markets become more constrained and the country
were to require external assistance, the sovereign rating could
transition to substantially lower rating levels.
Although unlikely in the near future, a substantial improvement
in economic conditions, a more benign funding environment and a
stabilisation of the banking system without the need for further support
than what is currently expected by the authorities would lead to a stable
outlook.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was "Sovereign Bond
Ratings Methodology", which was published in September 2008.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the rating are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Jaime Reusche
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades Slovenia's government bond rating to Baa2 from A2, maintains negative outlook
