In a report released on Thursday, Moody's notes that the government has already provided capital support of close to 1% of GDP to Slovenia's largest bank NLB, while projecting that the country's largest three banks (NLB; NKBM and Abanka Vipa) are likely to require a capital support in the range of 2% to 8% of GDP.

The negative outlook reflects Moody's view that the deteriorating macroeconomic environment amplifies the risk for Slovenia's financing and "opens the possibility that external assistance may be required".

Should Slovenia's access to public debt markets become more constrained and the country were to require external assistance, the sovereign rating could transition to substantially lower rating levels, Moody's maintains.

Although it deems it unlikely in the near future, Moody's also says that "a substantial improvement in economic conditions, a more benign funding environment and a stabilisation of the banking system without the need for further support than what is currently expected by the authorities would lead to a stable outlook".

The agency notes that the cost of government funding is rising and that access to financial markets remains constrained, which is reflected in a greater reliance on shorter-term issuance and loans.

The agency underscores that the government's fiscal challenges and efforts to stabilise its debt metrics are exacerbated by the Slovenian economy's continued weakness and rising vulnerability to shocks given its reliance on exports and the weakness of the corporate sector.