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Moody's Rating Downgrade Adds To Slovenia Bailout Fears

Moody's Investors Service downgraded Slovenia's credit rating to 'junk' on Tuesday, fueling concerns that the euro member will be the next in line to ask for a EU bailout.

Slovenia's government bond rating was cut to Ba1 from Baa2 with a 'negative' outlook. Moody's said the risk that Slovenia may require external assistance to meet its financial obligations has increased, largely due to uncertain funding environment.

According to the rating agency, the decision to lower the rating was driven by the state of Slovenia's banking sector, a marked deterioration of the government balance sheet and uncertain funding prospects.

Moody's expects Slovenian banks' asset quality to continue to deteriorate, given the weak economic environment. The agency forecasts the economy to face another year of recession in 2013, before a weak recovery in 2014.

According to the rating agency, risks remained skewed firmly to the downside and the economic outlook will depend to a large degree on the stabilization of the banking crisis.

The 'negative' outlook reflected Moody's view that the challenges of the banking system remained substantial. The weak macroeconomic environment amplifies these challenges and increases the possibility of losses to bondholders, the agency said.

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