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Standard & Poor’s Slovenia Rating Cut

Another European Concern

The credit-rating firm of Standard & Poor’s announced that it is lowering the rating on the nation of Slovenia by one notch. The country’s status is now A-minus, which is considered to be 4 levels above junk status. The rating was lowered from A after being under a credit watch since November, 2012.

With the announcement, officials at Standard & Poor’s pointed to the rising debt level of Slovenia, a problem shared by many of its neighbors. There is also concern over the nation’s prospects for economic growth, necessary to service the increased level of debt.

The latest downgrade in credit ranking follows a similar drop of 1 level in August of 2012. At that time, the credit-ranking firm pointed to ongoing disagreements within the government, hampering its ability to deal with the growing economic problems. At that time, the firm expressed early concern about further downgrades. With the most recent action, the firm indicated no current concern over further downgrades.

The Burden of State-Owned Banks

The firm cited Slovenia’s ongoing challenge to support its state-owned banks as the reason for the debt concerns. Higher than expected debts from these banks continue as a substantial drag on the economy. The agency also pointed out in its release that these problem banks created policy and implementation hurdles as economic and fiscal pressures grow.

Noting the downward impact of these issues, the government is constrained in its ability to adopt and implement actions to resolve the banking system problems. This, in turn, impacts the public debt crisis and retards the prospects for needed growth in the private sector.

The Slovenia Budget Deficits

The compounding concerns in the areas of health-care, needed labor and state reforms, and budgetary items were also mentioned by the agency. The current government no longer has a majority in parliament and is not able to move forward on badly needed reforms.

Fiscal deficits in Slovenia’s budget averaged over 5% over the past 4 years, and the debt ratio saw a troubling increase to 48% of GDP in 2012. The cited problem with the state-owned banks brings with it a projection of another 3-4 billion Euros for 2013.

The announcement was not all bad news. Standard & Poor’s analysts predicted a decline in the overall deficit to approximately 3% of GDP, nearly half of the previous few years. This decline is attributed to success in various reforms, including cutting public-sector wages.

The impact of the ratings cut will be a motivation for Parliament to continue to focus on the needed reforms.