World Bulletin/News Desk
Slovenia abandoned an attempt to issue bonds and Moody's cut its debt rating to "junk" on Tuesday, dealing a blow to the country's goal of healing its ailing state-owned banks and avoid following Cyprus into the euro zone's emergency room.
The move raises the prospect the tiny Alpine state of 2 million will have to ask its euro zone partners for a bailout as its mostly state-controlled banks struggle under the weight of bad loans worth around a fifth of the economy.
The downgrade followed weeks of criticism from investors, European Union officials and analysts that Prime Minister Alenka Bratusek's government has been too slow revealing details of a bank clean up and austerity measures they say are required to shrink a budget deficit swollen by a double-dip recession.
Earlier in the day, Ljubljana went to market and received $6 billion in bids for five- and ten-year dollar denominated bonds with yield guidance of around 5 and 6.125 percent, according to Thomson Reuters market service IFR.
But the Finance Ministry scuppered the deal, citing a looming ratings decision. Moody's Investor Service then downgraded Slovenia's rating two notches to Ba1, from Baa2, taking it into non-investment grade territory.
"The Moody's downgrade is not a surprise and more downgrades can be expected until reforms are enforced," said Saso Stanovnik of investment firm Alta Invest.
Moody's left the rating with a negative outlook, citing its troubled banking sector, deterioration in the government's balance sheet and uncertain funding prospects.
The yield guidance of the abandoned bond offer was above the 5.7 percent Slovenia paid to sell similar paper last year, a result of increasing market pressure since the chaotic bailout of Cyprus last month.
The yield on Slovenia's benchmark 10-year bond rose to 5.948 percent after the announcement, up by 0.078 percentage points since Tuesday morning and well above 4.77 percent on March 15, the day before the Cyprus bailout deal.
Slovenia's refusal, alone among the European Union's ex-Communist eastern members, to put state companies into private hands helped it jump ahead of its peers in living standards but avoided painful economic restructuring.
Its financial sector, dominated by state controlled or largely owned Nova Ljubljanska Banka, Nova KBM and Abanka Vipa, is choking on an estimated 7 billion euros in bad loans.
Bratusek's month-old government has said it will reveal its reform plan on May 9 while privatisation plan is also expected early next month. She says Slovenia can deal with that problem on its own and has pledged to start moving non-performing loans to a "bad bank" by June.
The government aims to recapitalise the banks with 900 million euros this year and aims to later sell at least one.
The government is also due to announce privatisations in May, and austerity measures to trim the budget deficit that will include a 5 percent cut this year in the public wage bill.
Analysts said the downgrade would raise the cost of financing the other 2 billion euros they estimate it needs to shore up the banks and pay for other spending by the end of this year, but investors could be drawn to its high yield rather than shut it out of the market altogether.
"This move proves that the road to navigate is very risky," said Peter Attard Montalto from Nomura International.Last Mod: 01 Mayıs 2013, 10:42