In this round, IHS Global Insight has downgraded Slovenia's short-term sovereign risk rating by one notch, to 25 (A- on the generic scale), due to the increasing political instability that jeopardises the country's immediate ability to find a solution to its banking crisis and, if needed, appeal for an international bailout. At the end of February, the government finally collapsed, succumbing to a series of coalition defections. A new government was formed in March, but given the disparity of political opinions in the new coalition, this current government faces stability questions of its own. The need to adopt critical, yet painful, fiscal reforms as part of a banking system rescue will put tremendous political strain on the government.

Significance: Should this new government face the same fate as the last, early elections will be necessary, further delaying critical reforms needed to push through critical reforms. Moreover, as Slovenia waits for a new election that has a broader popular backing, this would create a vacuum of leadership in the country at a time during which it may be necessary for the government to appeal for an international bailout. Without a government with enough authority, there is no guarantee that an international bailout package could be created in time to avoid short-term problems. It is this worry that has forced us to downgrade the country's short-term risk rating. The outlook remains Negative, with a further downgrade possible with the intensification of either the political instability or the banking crisis. The medium-term sovereign risk rating, for now, remains unchanged at 30 (BBB+ on the generic scale), also with a Negative outlook, again dependent upon the trajectory of the political, banking, and fiscal crises.

Source: bne