No Respect at Moody’s as Bondholders Upgrade Tusk: Poland Credit

Poland's Prime Minister Donald Tusk
Donald Tusk, Poland's prime minister pledged to narrow the budget deficit and speculation mounted that the central bank would cut borrowing costs. Photographer: Jock Fistick/Bloomberg

Poland’s improving public finances aren’t enough for an upgrade at Moody’s Investors Service, even as the derivatives market deems the nation’s bonds as safe as French debt that’s rated four steps higher.

The cost to protect against a default by Poland, ranked at the sixth-highest level of A2 by Moody’s, has tumbled 197 basis points this year to 83, three basis point below credit-default swaps for France, which has an Aa1 rating, data compiled by Bloomberg show. The yield on Poland’s Eurobonds due 2022 fell to a record 2.53 percent this week, cutting the premium over comparable French notes to 80 basis points from 205 on Dec. 31. Moody’s affirmed Poland’s rating and stable outlook on Dec. 7.

Polish bonds rallied this year as near-zero interest rates in the U.S. and the euro area stoked demand for higher-yielding debt from the only European Union country to avoid recession since 2009. Concern France’s economic outlook was worsening led Moody’s to strip the nation of its top rating last month, following a similar move by Standard & Poor’s in January.

“Poland’s rating has improved relative to western Europe as countries including France got downgraded,” Felix Herrmann, an emerging-markets analyst at DZ Bank AG, said by phone from Frankfurt yesterday. “It is not too low compared to other emerging markets and is roughly in line with fundamentals. The agencies have become much more careful with top ratings.”

Investor Demand

International holdings of Poland’s domestic bonds increased to 186 billion zloty ($59 billion) at the end of October, or a record 35 percent of the total, as Prime Minister Donald Tusk pledged to narrow the budget deficit and speculation mounted that the central bank would cut borrowing costs. Poland has the largest economy in the EU’s east.

While Tusk “achieved significant fiscal consolidation,” the country’s financial “vulnerabilities” including a current-account deficit and foreign-currency loans are barring a rating upgrade, Moody’s said in last week’s report. The current-account gap was 4.8 percent of gross domestic product in the second quarter. The share of foreign-denominated loans in Polish banks was 26 percent of total assets on June 30, according to the financial regulator’s website.

‘Very Forward-Looking’

Moody’s hasn’t changed Poland’s grade since November 2002, when it raised it to the current level from Baa1. That upgrade was “very forward-looking” and Moody’s has since been looking “beyond the immediate economic cycle” to assess the country’s longer-term credibility, Jaime Reusche, a sovereign-debt analyst at the ratings company, said yesterday in a phone interview from New York.

“That Poland has preserved its rating through substantial shocks in the past years shows it is a very solid credit,” Reusche said. “While the creditworthiness of France or the U.K. has been deteriorating, they are bigger economies with reserve currencies and greater shock-absorption capacities.”

Standard & Poor’s affirmed Poland’s A- rating four months ago, saying its “relatively high” indebtedness and “large” external financing needs offset the country’s deficit cuts. S&P raised the country from BBB+ in March 2007, two months after Fitch Ratings carried out the same change.

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on more than 300 upgrades, downgrades and outlook changes going back as far as 38 years and through Dec. 3.

Extra Yield

The rates moved in the opposite direction 49 percent of the time for Moody’s and 47 percent of the time for S&P. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

The extra yield investors demand to hold 10-year zloty debt rather than Aaa-rated German bunds fell to the lowest since April 2010 today by 10:57 a.m. in Warsaw. The premium stood at 250 basis points down from this year’s peak of 425 on May 31.

Helped by the zloty’s 9.1 percent gain versus the euro this year, the second-best worldwide, Polish bonds have returned 24 percent in euros, according to data compiled by the European Federation of Financial Analysts Societies and Bloomberg. Czech notes returned 15 percent and haven bunds 4.2 percent. Only higher-yielding and lower-rated Greece, Portugal, Hungary and Ireland have performed better among 26 sovereign EFFAS indexes.

The post-communist country’s public debt at 56 percent of GDP compares with 90 percent in France and 93 percent for euro members on average, according to forecasts for 2012 from the European Commission. Czech government debt, rated a notch higher than Poland at A1 by Moody’s, accounts for 45 percent of GDP, while junk-rated Hungary’s stands at 78 percent.

‘Attractive Combination’

The euro area’s debt crisis has pushed investors to Poland because it “offers an attractive combination of safety and high yields -- as opposed to Germany, which is safe but brings no return, and Spain, which gives a high return but is risky,” Katarzyna Rzentarzewska, a Prague-based economist at Erste Group Bank AG, wrote in a report to clients yesterday.

“A positive growth rate and generous interest-rate differential will further attract investors to Polish debt,” she said. “We see room for a further drop in yields.”

Polish default swaps, or CDS, were little changed today at 83 after reaching a four-year low yesterday, data compiled by Bloomberg shows. The contracts cost 79 basis points less than the average for countries in emerging Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index, compared with a 70 basis-point discount at the end of 2011.

‘Justified Low’

The swaps, which decline as perceptions of creditworthiness improve, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

“We have reached a level in Polish CDS that many consider as the justified low,” DZ Bank’s Herrmann said. “We see some risk of profit taking.”

The extra yield investors demand to hold Polish dollar-denominated bonds instead of U.S. Treasuries fell four basis point to a two-year low of 115 today, indexes compiled by JPMorgan Chase & Co. show.

“Stand-alone, Polish bonds may look expensive compared to ratings, but from a relative-value perspective I still prefer them to French bonds,” Peter Schottmueller, who helps manage the equivalent of $5.3 billion in emerging-market debt at Deka Investment GmbH, said by phone from Frankfurt yesterday. “The tremendous hunting for yields is the main driving force.”

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