Slovenia Credit Rating Downgrade Prompts New Austerity Measures

Includes: ESR, GUR
by: Mary Daniel

On January 12, 2012, Standard and Poor’s downgraded the credit rating of nine eurozone nations. Slovenia was one of them. S&P downgraded the Eastern European nation to A+. Slovenia adopted the euro in 2007. The nation’s public debt has increased from 38.8% of GDP in 2010 to an expected 50.1% of GDP in 2012. At the same time, the public deficit as it pertains to GDP has remained constant.

Slovenia’s economy is heavily dependent on exports. Germany is currently Slovenia’s largest market for exports. Slovenia’s largest firms include Krka and Gorenje. Krka is a pharmaceuticals and cosmetics producer that sold EUR 768.2 million euros from January through September 2011. Gorenje manufactures sleekly designed home appliances that would please any modern design asthetic.

The Balkan nation has cited the ratings cut as excessive on Standard and Poor’s part. S&P deemed a recent EU summit as unproductive and blamed no breakthroughs as the reason for the downgrade. Moody’s lowered its rating of Slovenia’s creditworthiness in December to A1, citing a risk that government finances might be needed to bail out the banking sector.

Slovenia has been without an official government since September. Borut Pahor lost the position of prime minister in a no-confidence vote. Zoran Jankovic was elected in December, but failed to draw enough support to be approved as Pahor’s successor by legislators. Also, a new fiscal pact will require Slovenia to cut public spending. The pact is being strongly forced by both Germany and France. The Balkan state faces rising debt along with an absence of leadership. However, considering the current economic climate, Slovenia appears, by the numbers at least, to be holding up to the turbulence quite well in relation to other European nations.

Even without a clear leader, Slovenia is making changes to ease the economic strains on the nation. Just today, in response to the downgrade, Slovenia’s parliament agreed to cap the country’s public debt. Also this week, a panel of legal experts from Slovenia and Croatia came to an agreement over their border disputes, with both sides quickly ratifying the agreement and making references to neighborly relations. Slovenia may be looking to have Standard and Poor’s reverse their decision sooner rather than later. At the very least, the downgrade provided some motivation for the nation.

Individual investors will have a difficult time gaining exposure to Slovenia. There are only a small number of ETFs that maintain holdings in the country. The iShares MSCI Emerging Markets Eastern Europe Index Fund (NYSEARCA:ESR) and the SPDR Emerging Europe ETF (NYSEARCA:GUR) both provide only limited exposure to this country in particular. Both ESR and GUR, however, do provide weighted exposure to the Eastern European region as a whole.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.