LJUBLJANA, Slovenia (AP) -- Two ratings agencies, Moody's and Standard & Poor's, downgraded Slovenia's government bonds on Friday due to concerns over the country's troubled banks and its high borrowing rates.
Moody's cut by three notches, from A2 to Baa2, just two steps above junk while S&P cut it by one notch to A from A+.
Moody's cited the funding challenges the government faces and "substantial" risks to the small European country's financial system.
It added that "the deteriorating macroeconomic environment" in Slovenia, first ex-Communist country to adopt the euro, "opens the possibility that external assistance may be required."
The agency believes that the three banks are likely to require rescue money in the range of 2 percent to 8 percent of the country's gross domestic product of about €35 billion ($42.86 billion).
"The likelihood of support being needed is very high," Moody's said in a statement, adding it kept its outlook negative.
S&P's credit grade for Slovenia is higher than that of Moody's, but it cited many of the same concerns. It also kept its outlook negative, meaning it could make another downgrade if the banks weaken further or the country fails to implement promised economic reforms.
Slovenia's banking sector notched up its third successive year of losses in 2012. The country's three biggest banks are now calling for injections of capital by the state. The debt crisis has led to a freeze on bank lending, particularly affecting the construction and financial services.
Moody's noted that a potential additional debt burden comes at a time when the government is already facing significant challenges in its efforts to consolidate its fiscal position.
The general government deficit in 2010 was 6 percent of the country's gross domestic product in 2010 and despite consolidation efforts that brought the deficit close to 5 percent of GDP, capital transfers of 1.3 percent of GDP pushed the deficit to 6.4 percent for 2011. The center-right government is targeting a general government deficit of 3.5 percent of GDP in 2012 and for 2013 it expects to reduce the imbalance to 2.5 percent of GDP, Moody's said.
"However, continued weakness in the economy could hinder the achievement of these targets," Moody's added. "Finally, additional capital injections into the banking system could materially affect the country's deficit trends."