Slovenia’s bond rating took a major hit in the past week as two different rating agencies downgraded the quality of their government bonds. When the S&P downgrade Slovenia’s bond rating by only one notch it may seem like a minor concern, but the rating of A rather than A+ poses a major threat to the nation’s economic health. Moody’s financial ratings cut the bonds all the way down to Baa2, meaning they are only two precarious steps higher than a junk rating. Slovenia is just one of the several small Eurozone nations in the past few years that have seen their economies implode and their credit ratings fall apart as the global financial crisis has kept smaller economies from competing with their larger neighbors.
The state of the Slovenian credit means that government-issued bonds will be much less attractive towards investors, foreign or otherwise. Moody’s claimed that the economic environment within Slovenia was deteriorating and that the need for external help has never been higher. It calls into question whether the tiny nation bordering Italy, Austria, and Hungary will be subject to a bailout by stronger Eurozone partners, just as credit-degraded nations like Greece and Ireland find themselves in. Three national banks exist in Slovenia, the first formerly-Communist nation to become part of the Eurozone, but do not have the capital needed to boost the economy through direct lending. The nation may require a bailout that could be between two and ten percent of Slovenia’s GDP; possibly a sum as great as 3 billion Euros.
The outlook provided by the S&P as well as Moody’s is quite grim for Slovenia’s future. While the nation boasts a better per-capita GDP than its neighbors and most of Europe, their economy is slated this fiscal year to decrease by about one percent. Given that the nation’s main economic engine is exports (primarily automobiles) at a time when few Eurozone partners are willing to buy, it remains unlikely that Slovenian credit will rebound without external help.
The political scene in Slovenia is precarious. The government ran only a six percent deficit in the past year and is attempting to lower that figure to four or even three percent in the next budget. Yet reducing spending will not provide enough money flow to help the economy, and a Moody’s spokesperson remarked that a foreign injection of capital into Slovenian banks would do more to affect the deficit than internal policies.