bne -

Slovenia suffered another blow to its efforts to avoid becoming the next Eurozone country to require a bailout on May 17, as Fitch Ratings cut the Balkan country's long-term foreign currency rating one notch, to 'BBB+' from 'A-', and warned a further downgrade could be on the way.

"There remains a significant divergence between official and Fitch estimates of bank recapitalisation costs," Fitch said of the country's crumbling lenders. A large chunk of the Slovenian banking sector is state-owned, and burdened with bad loans worth about 20% of GDP.

Ljubljana is pushing an overhaul of the banks, and is drawing up plans to sell 15 state firms, including the second-largest lender Nova KBM. It also unveiled on May 9 a mix of spending cuts and tax rises designed to bring down the budget deficit.

However, Fitch said it now expects a 2% contraction in the Slovenian economy this year, and a decline of 0.3% in 2014. The agency warned it could cut its rating of the sovereign further should the recession go deeper and longer than currently forecast. The rating outlook remains negative.

Standard & Poor's rates the country 'A-' with a stable outlook. Moody's rates the country 'Ba1' with a negative outlook. That junk rating from Moody's, announced in late April, in the very midst of a Eurobond issue crucial for keeping the country's finances in check, still riles Ljubljana.

The government was forced to postpone the issue during the sales process. It resumed the sale two days later, even managing to tighten the yield on the $3.5bn papers.

Prime Minister Alenka Bratusek said in an interview published on May 18 that Slovenia will now demand Moody's explain the timing of the downgrade. "No rating agency can allow itself to do what they did," she insisted, saying that it had warning the move was afoot, Slovenia "would not have pushed ahead with the sale."

Depending on the answer Ljubljana receives from the rating agency, the PM added, the government may consider suing Moody's.