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Slovenian bank recapitalisation costs are likely to rise well above official estimates, Fitch Ratings warned in a statement on September 12. The agency now says the country's troubled banks may need as much as €2.8bn, or 8% of GDP, in fresh capital - more than twice the amount suggested by officials.

"The overall clean-up costs could be underestimated by the Slovenian government," Fitch said in its statement. "We make tougher assumptions on peak non-performing loan levels, their coverage and target capital ratios."

"In addition, the sovereign may also need to provide liquidity to support the transfer of assets to the bad bank," the rating agency continued. "However, our base case remains that the sovereign can afford the bank restructuring costs." Fitch adds that last week's announcement of the winding down of two small banks underlines the authorities' determination to tackle weaknesses in the banking sector without imposing losses on senior creditors.

Tim Ash of Standard Bank suggests few will be surprised that the clean-up costs will be larger than first thought. After all, the government initially estimated bank recap costs at €1.2bn, then the central bank governor recently indicated €1.5bn.

He also agrees that the public sector balance sheet is strong enough to take this hit, given the still modest public sector debt/GDP ratio. Even after the costs of cleaning up the banking sector, it will still sit well below the EU average, at around 75% of GDP.

"A bigger question mark ... is domestic political stability against a backdrop whereupon the government have promised the EU that they will come up with a new fiscal consolidation programme later this month," Ash says. "Within the ruling coalition, splits are now appearing, particularly DeSus, the small pensioners party - and if they leave the coalition loses its majority. The assumption is that any fiscal consolidation will be lighter on revenue-side measures and will now need to focus on expenditure cuts - with pensions/wages taking the strain herein."

Otilia Dhand of Teneo Intelligence points out that the instability of government has been a constant risk to the implementation of banking sector reform, and that it has resurfaced in recent days. "Even though a collapse of the coalition remains unlikely for now, investors should continue to monitor the risk of government instability in the near future as cuts are being discussed and differences among coalition parties continue to play out," she says.

Meanwhile, Fitch points out that uncertain market conditions mean that agreeing an appropriate transfer value for the bad bank assets among several parties, including the European Commission, is a challenge. "It is possible the asset transfer could be pushed back again, having already been extended by four months to October," it said.