Slovenia’s new government needs to fix the country’s troubled banks and complete an overhaul of the economy to avoid a bailout, Fitch Ratings said.
Slovenia “will be able to avoid requesting international financial assistance” if the two-day-old Cabinet of Premier Alenka Bratusek maintains investor confidence and the ability to borrow “at reasonable terms” while implementing legislation to set up a so-called bad bank, Matteo Napolitano, director at Fitch in London, wrote in the report released Friday.
“Failure to tackle these issues in a timely manner would increase pressure on the A-minus sovereign rating,” Napolitano said. It’s unclear what final shape the bad-lender plan will take as “asset quality continues to deteriorate, banks’ capital buffers are thinning and implementation risks remain.”
The government vowed to stick with a bank-recapitalization plan of as much as 4 billion euros ($5.2 billion), though with unspecified modifications, as surging bad loans at lenders such as Nova Ljubljanska Banka d.d. fuel investor concern that the country may require a rescue. Mounting bad loans and a poor economic outlook make the recapitalization plan more urgent, according to Fitch.
Weak domestic consumption, contracting credit and indebted companies, along with slumping demand in main trading partners such as Germany and Italy, continue to weigh on the Alpine nation’s economy, it said. Gross domestic product, which fell an annual 2.3 percent last year, will drop an estimated 1.6 percent this year, the ratings company said.
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