Standard & Poor's on Tuesday cut Slovenia's sovereign credit rating by one notch to 'A-' from 'A', citing the likelihood of an increased debt burden due to support of its state-owned banks and uncertain growth prospects. The rating outlook was revised to stable from CreditWatch negative.
"We also observe rising policy-implementation risks to resolving economic and fiscal pressures," S&P said in a statement. "In our view, this confluence of factors constrains Slovenia's ability to further implement policy responses to help boost its banking system, public finances, and growth prospects."
The rating matches that of Fitch Ratings, which has the euro zone member state at 'A-' with a negative outlook. Moody's has Slovenia at two notches lower at 'Baa2' with a negative outlook.
The rating agencies have already warned Slovenia repeatedly that in order to retain its rating, Slovenia needs to accelerate reforms to its labour market, pensions and banking system. But these reforms are in doubt now that a second member of Slovenia's coalition announced its intention to leave the government over the corruption scandal engulfing Prime Minister Janez Jansa.
Jansa's conservative alliance had already lost its majority in parliament in January when Civic List and its two cabinet ministers quit. That left it with the support of just 36 MPs in the 90-seat parliament. Now the February decision by the pensioners' party Desus to leave the coalition deprives the PM of a further six seats, making it that much more difficult for him to remain in office. 
The row centres on Jansa's refusal to resign or face a confidence vote following a report by the state anti-corruption commission in January that said he could not explain the origin of assets worth €210,000. Jansa has denied wrongdoing. However, with the opposition still struggling to put a rival coalition together, and Jansa seemingly happy to tough it out in a minority capacity, Tim Ash of Standard Chartered predicts that, "this could all drag on for some time." Yet that would be disaster for a struggling economy in desperate need of strong leadership to put it back on track and avoid becoming the next Eurozone country to require a bailout. 
Slovenia has been back in recession since 2011, with the country's mostly state-controlled banks crumbling under bad loans worth about 20% of annual GDP. Recent data showed the proportion of loans now considered non-performing (NPL) in the first nine months of 2012 grew to 14.2% of total loans, representing almost €7bn in bad debt. While the proportion of NPLs at foreign-owned banks is stable, it's rising at the state banks. 
According to S&P, government support for the state-controlled banks will increase its debt in 2013 by about EUR3bn-4bn. That is the amount S&P said it believes will likely be needed to fund the transfer of the banks' distressed assets to the government-owned Bank Asset Management Company. "In such a scenario, we forecast the net general government debt ratio will rise to 59 percent of GDP at end-2013 and exceed 60 percent thereafter - well above our previous forecast of 53 percent for 2013," S&P said.
Earlier on Tuesday, central bank governor Mark Kranjec said in a published interview that Slovenia must recapitalize its state banks and then sell them.
But measures to try to halt the slide are now under threat from the political crisis. This had analysts like Ash warning that Slovenia faces potential credit rating downgrades, just as the country needs to mull issuing fresh debt on the international markets as its cash buffer erodes. 
Source: bne