Guy Norton in Zagreb -

Slovenia faces the unwelcome prospect of further credit rating downgrades and falling investor confidence as a result of the inability of the country's fractious politicians to agree on who should lead the country.

Hopes that Slovenia's December 4 general election would result in the rapid formation of a new government have been dashed, following the failure of prime minister-designate Zoran Jankovic on January 12 to secure sufficient support in the Slovenian parliament, the National Assembly, to form a new administration.

Jankovic, whose Positive Slovenia party was the surprise winner of the snap election in December, failed to secure the necessary 46 votes in the 90-seat National Assembly to ensure that he could form a coalition government that would be able to address the country's growing catalogue of economic ills, which is likely to see the country lapse into recession this year.

That failure leaves Slovenia facing at least another month of political uncertainty at a time when there is growing concern over Slovenia's ability to cope with the prospect of declining creditworthiness and rising funding costs.

Downgrade

Since November, yields on Slovenian government bonds have risen above the 7% level considered sustainable for members of the Eurozone, which the country joined in 2007. The rise in bond yields has been fuelled by a series of rating downgrades in recent months, the most recent on January 13 when Standard & Poor's cut its rating from 'AA-' to 'A+' and kept it on negative watch, meaning further downgrades "if the new government does not present, and begin to implement, a credible reform programme, one that is likely to include reforms in the labour market and pensions system, [and] to ensure growth that would maintain GDP per capita at the current level or higher."

Moody's Investor Services cut the country's sovereign rating to 'A2' from 'A1' on December 22; Fitch, the other major credit rating agency, said in January it would complete a review of its 'AA-' rating by the end of the month, with many observers expecting it to follow S&P and downgrade the country to 'A+'.

Under the terms of the Slovenian constitution, President Danilo Turk has two weeks in which to name a new candidate for the premiership. Turk told Slovenian press agency STA that he would soon start a new round of talks with party leaders before nominating a new candidate for the premiership.

Alternatively, a minimum of 10 members of parliament can submit their own proposal for a new prime minister. If none of the proposed candidates secures a parliamentary majority, then fresh elections must be called, which would necessarily further prolong the political impasse in the country since the previous government headed by Borut Pahor lost a confidence vote in September.

The closeness of the December elections means that there are a number of possible political combinations. Although Jankovic's centre-left Positive Slovenia won 28 seats, the right-wing Social Democratic Party (SDS) headed by Janez Jansa, who was premier from 2004-08, came in a close second with 26 seats. Pahor's left-wing Social Democrats (SD) won 10 seats and the centrist Citizens' List of Gregor Virant, headed by a former minister in Jansa's government, secured eight seats. The conservative Slovenian People's Party (SLS) and the centrist Pensioners' Party (DeSUS) each have six seats, while the right-wing New Slovenia (NSi) party has four. Two seats are held by the Hungarian and Italian minorities in the country.

US Ambassador to Slovenia Joseph Mussomeli earlier in January earned a reprimand from President Turk following media reports that he had offered himself as a mediator between various political parties and suggested that Slovenian politicians put aside their ideological differences for the sake of political stability and create a broad coalition containing both left- and right-wing factions. Turk labeled Mussomeli's supposed offer as "inappropriate". For his part, Mussomeli rejected claims of political meddling, telling STA that his meetings with Slovenian politicians were "nothing unusual" and claimed his talk of a broad coalition had been misunderstood by Turk. "I think everyone from the president down agrees that to carry out the reforms it needs Slovenia ideally needs more than a slim majority in parliament... The broader the coalition, the more effective the government will be. Also this will resonate better with the Slovenian people, both left and right."

The political vacuum in Slovenia means that it will be mid-February at the earliest before new ministers are in place to address the thorny issue of strengthening the country's weakened finances. According to the central bank governor, Marko Kranjec, Slovenia needs to cut public spending by at least €1bn this year if it is to conform with the Eurozone's anti-crisis plan and cut its budget deficit from 4.3% of GDP at present to 3% by 2014. Another concern is the heavily indebted banking sector, which has been saddled with growing bad loan losses and needs to attract at least €4bn of fresh capital to restart lending. "Bank losses will be even bigger this year as assets continue to decline, the fight for deposits intensifies and financing from abroad shrinks," Kranjec told business daily Finance.