Slovenia saw its credit rating cut to Ba1 from Baa2 - just two notches above "junk" status - on Tuesday after Moody's said the small, alpine nation's banking sector was in "turmoil." It also cited a "marked deterioration" in Slovenia government finances and "uncertain" funding prospects.

Moody's assessment prompted Slovenia's Finance Ministry on Tuesday to rescind a bond auction which had been intended to raise a much-needed 2.2 billion euros ($3 billion) in funding.

The US ratings agency warned that Slovenia could soon become the next eurozone member to seek a bailout. Slovenia joined the European Union in 2004 and adopted the euro currency in 2007.

"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", Moody's said.

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

So far, international lenders have approved eurozone bailout packages for Greece, Ireland, Portugal, Cyprus and Spanish banks.

Slovenia's six-week-old government of centre-left Prime Minister Alenka Bratusek (pictured above with European Commission chief Jose Manuel Barroso) plans to present a reform programme for dealing with the banking crisis and fixing the nation's public finances in Brussels by May 9.

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

Banks strain public finances

Since the 2008-2009 global financial crisis, Slovenia's government has recapitalise local banks with taxpayers' money, putting a major strain on public finances.

Banks as a result became reluctant to lend any more cash and the economy stumbled.

It contracted by 2.3 percent in 2012 and Slovenia's central bank has warned that gross domestic product will shrink by a further 1.9 percent this year.

Unemployment stands at 13.5 percent, and recent months have seen mass protests by people angry at austerity measures.

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.

ccp/ipj (AFP, Reuters)