Moody's downgrades Slovenia, warns might need bailout

The international ratings agency Moody's downgraded Slovenia on Tuesday by two notches to junk status, with a negative outlook, citing the troubled state of the banking sector and a deterioration of the government's finances, and warning that the eurozone member might need a bailout.

Moody's said Slovenia's sovereign debt rating had been cut to "Ba1" from "Baa2", placing it in the speculative category, and added that uncertain funding prospects had heightened "the probability that external assistance will be needed".

The rating's agency said: "The first key factor underpinning today's rating action is 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."

The second factor was "the substantial increase in Slovenia's government debt metrics," also described as the "marked deterioration of Slovenia's government balance sheet."

Thirdly, Moody's pointed to "the uncertain funding environment facing Slovenia, which heightens the risk that the sovereign will require external assistance to meet its financial obligations."

Slovenia has been widely tipped as the next eurozone member to require a bailout from the European Union and International Monetary Fund, and the ratings downgrade could substantially raise the cost of borrowing for officials in Ljubljana.

So far, international assistance has been approved for Cyprus, Greece, Ireland and Portugal, and for Spanish banks.

Finally the ratings agency said: "The negative outlook reflects Moody's view that the challenges of the banking system remain substantial. The weak macroeconomic environment amplifies these challenges and increases the possibility of losses to bondholders."