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imageLJUBLJANA: Slovenia moved a step closer late Tuesday to becoming the next eurozone member to need a bailout after Moody's slashed its credit rating two notches to "junk" status.

The announcement by the US ratings agency forced Slovenia's finance ministry to pull a bond auction that it had hoped would raise a much-needed 2.2 billion euros ($3 billion).

The cut to Ba1 from Baa2 was made because of "turmoil" in Slovenia's banking sector, a "marked deterioration" in government finances and "uncertain" funding prospects, Moody's said.

"Slovenia's vulnerability to external shocks, like those brought about by the crisis in Cyprus, could make it difficult for the sovereign to fund itself at sustainable rates", it said.

This "increases the likelihood that authorities would need to request an external assistance programme," it added.

So far, international assistance has been approved for eurozone members Cyprus, Greece, Ireland and Portugal, and for Spanish banks.

After two-million-strong Slovenia joined the European Union in 2004 as a model newcomer and the single currency in 2007, its banks went on a lending spree.

But the country was hit hard by the global financial crisis of 2008-09, and many of the firms that had borrowed so heavily collapsed as the economy went into reverse.

This left lenders sitting on a pile of toxic debt, requiring the government to recapitalise the banks with ever larger chunks of taxpayers' money, putting a major strain on public finances.

With banks as a result reluctant to lend any more cash, and a slowdown across the eurozone hitting demand for Slovenian exports, the economy has stumbled.

Having contracted by 2.3 percent in 2012, gross domestic product is expected to shrink by a further 1.9 percent this year, according to the central bank.

Unemployment stands at 13.5 percent, and recent months have seen mass protests by people angry at austerity measures and at what they see as a corrupt and feckless political elite.

The European Commission predicts that Slovenia's public deficit will be 5.1 percent of GDP in 2013, far above the eurozone limit of three percent and even wider than the 4.4 percent recorded last year.

Things are little better on the political front.

Borut Pahor's centre-left government collapsed in late 2011 after a referendum rejected major reforms to the country's pension system.

The subsequent centre-right Janez Jansa lasted only until this February after accusations of corruption and major protests against austerity cuts combined to fell his administration.

The new six-week-old government of centre-left Prime Minister Alenka Bratusek plans to present to Brussels by May 9 a reform programme for dealing with the banking crisis and fixing public finances.

Bratusek, who only became an MP in 2012 and party leader earlier this year, said this month in a fraught trip to Brussels that her government was working "day and night" to shore up its financial system.

A draft programme published last week showed the government estimates the three largest state-owned banks will need at least 900 million euros in the first half of the year.

<Center><b><i>Copyright AFP (Agence France-Presse), 2013</b></i></center>

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