Slovenia gains new leader, but loses some creditworthiness

By bne IntelliNews January 30, 2012

bne -

Almost two months after the country's December 4 parliamentary elections, Slovenian politicians finally agreed on the composition of a new government on January 28. It is hoped it will have the strength and vision to restore the country's stumbling economic fortunes, exemplified by a two-notch downgrade from Fitch Ratings the day before.

On Saturday, January 28, Janez Jansa, leader of the Slovenian Democratic Party (SDS), was endorsed as prime minister by 51 votes to 39 in the 90-seat National Assembly after he had managed to cobble together a five-party, centre-right coalition agreement in the past couple of weeks. The SDS will be joined in power by the Gregor Virant Civic List, the Slovenian People's Party (SLS), the Pensioners' Party (DeSUS) and New Slovenia (NSi).

Following Saturday's vote Jansa now has two weeks to propose a list a ministerial candidates, which must be approved by parliament, meaning the country could have a fully functioning government by February 10. "I hope that there will be no undue complications, because they would take more time - time we don't really have," Jansa told state news agency STA.

He added that his government would prioritize three tasks: stabilising Slovenia's public finances, restarting the economy and enabling job growth. As well as thanking his coalition partners for their support, he also welcomed the fact that there is a general cross-party consensus in parliament on the urgent need to address Slovenia's economic ills. "This will make it easier to look for and negotiate on solutions... and search for broad consensus with experts outside of political circles."

Losing credit

Jansa's endorsement as prime minister brings to an end an unsettling period of political uncertainty following the fall of the centre-left administration headed by

Social Democrat leader Borut Pahor in a no-confidence vote in September, which led to a snap election in December. Although Zoran Jankovic's Positive Slovenia party topped the polls, Jankovic failed to gather enough cross-party support in parliament in mid-January to be voted in as prime minister. The lack of an effective government has added to uncertainties about Slovenia's ability to deal with the challenges of the continued eurozone debt crisis, which has led to sharply increasing borrowing costs and falling credit ratings.

Fitch Ratings on January 27 downgraded Slovenia's sovereign rating by two notches 'A' from 'AA-' and kept it on negative outlook, meaning there is more than a 50% probability that the country could be downgraded again in the next couple of years. According to Fitch, one notch of the two-notch downgrade relates to the intensification of the Eurozone crisis in the latter part of last year and the "potential financing and monetary shocks that members of the eurozone face in light of the increasing divergence in economic, monetary and credit conditions and prospects across the region". It said that the further one-notch cut was prompted by "the continued deterioration in the financial position of the banking sector, which has now made a loss for the past two years, and still poses a significant risk that the sovereign will need to contribute heavily to future bank recapitalization". Fitch estimates that recapitalisation of the country's domestic banks alone could cost €2.5bn, or 7% of GDP, and it remains uncertain whether the private sector will be willing to bear all the costs of such an operation.

With regard to the country's public finances, Fitch warned: "Slovenia's once firmly held reputation for fiscal rectitude lies in the balance and the next government will need to implement fiscal consolidation measures to re-establish the country's fiscal credibility."

Fitch said the main issues the new government will need to address will be cutting the budget deficit from an estimated 5.7% of GDP at the end of last year and trimming public debt, which has climbed sharply from 22% of GDP at end-2008 to an estimated 45% of GDP at end-2011.

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