"This is causing serious difficulties for the banking sector where non-performing loans have risen to 11.8% of the total as of Q1 2012", according to Bonitetna hiša I, a Dun & Bradstreet partner company.

With banks obliged simultaneously to raise their capital asset ratio to 9% to comply with EU regulations, there is an urgent need for a capital injection, the agency said.

Private capital is virtually unattainable given investors' fears about the extent of banks' toxic assets and their exposure to vulnerable euro-zone members such as Italy, the agency said, adding that the state-owned NLB needs well over EUR 500m before it can restart lending, while NKBM and Abanka need EUR 115m.

Dun & Bradstreet also pointed to a faltering business performance of companies in Slovenia. "Overall profitability is down by two-thirds from its pre-crisis peak: and a web of indebtedness is threatening many companies with insolvency, particularly in financial services, insurance and the construction sector, which have been hit particularly hard by the downturn."

Slovenia's fractious politics are not helping to resolve matters, the ratings agency pointed out. Parliament's failure to legislate the golden fiscal rule will fuel perceptions that it is unable to control the burgeoning public debt, it said.

"The state is already in arrears with internal contractors, especially in the construction sector, which are consequently defaulting on their debts to banks; and while the government has so far managed to service its obligations to foreign creditors, confidence is waning, with yields on long-term bonds now over 7%."

"Unless decisive remedial action is taken, Slovenia may be heading for the point of no return," the ratings agency warned.

Commenting on the downgrade during a visit to the Koroško region, Prime Minister Janez Janša said that the negative trend will persist until Slovenia adopts the necessary reforms and that "the coming weeks and months are crucial".

"All the measures which we are discussing now and which parliament will be adopting in the coming weeks add up to what will lift Slovenia from this dangerous zone and reverse these outlooks," he said.

He pointed to the pension reform, which he said was being coordinated with trade unions since spring and needed to be finalised soon. "These things need to be put in order by the end of the year," Janša said, warning against blockades of reforms.