The sovereign rating of the government of Slovenia was downgraded by Moody’s Investors Service from Ba1 to Baa2, which is considered ‘junk’ with a negative outlook on Tuesday. The rating agency cut its rating for the country following its decision to abandon its plan to issue bonds.

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According to Moody’s, its decision to downgrade Slovenia’s sovereign rating was driven by three factors including the current situation of the country’s banking sector, the deterioration of its balance sheet, and uncertainty of funding prospects which increases the possibility of a need for external assistance.

Moody’s noted that Slovenia entered another recession in 2012 and experienced a 2.3 percent decline caused by its banking crisis. The rating agency projected that Slovenia’s economy will drop by 1.9 percent this year and it will experience a weak recovery of 0.2 percent in 2014.

The rating agency also explained that its negative outlook for Slovenia reflects its conviction that the country’s banking system remains substantial and the weak macroeconomic environment increases challenges and a possibility that bondholders will incur losses.

Over the past several weeks, analysts, investors and authorities from the European Union (EU) criticized Prime Minister Alenka Bratusek’s government for being too slow in disclosing the details of its plan to fix its banking system and its austerity measures to reduce its budget deficit.

Early this month, analysts at Bank of America Merrill Lynch (BAML) opined that Slovenia may need approximately $10 billion bailout. A haircut on deposits is also probable.

Saso Stanovnik of Alta Invest commented that Moody’s decision to downgrade Slovenia’s sovereign rating is not surprising. He said, “The Moody’s downgrade is not a surprise and more downgrades can be expected until reforms are enforced.”

Slovenia’s state-controlled banks Nova Ljubljanska Banka, Nova KBM and Abanka Vipa are suffering from bad loans of approximately €7 billion. The government is scheduled to reveal its privatization and reform plans early next month. Prime Minister Bratusek vowed that all of the banks’ non-performing loans will be transferred to a newly established Bank Asset Management Company also known as the “bad bank” by June. The government plans to recapitalize the banks with €900 this year.