Polish Rating Cut for First Time as S&P Warns on Power Grab

  • Cut follows erosion of Poland's checks and balances, S&P says
  • S&P foresees reversal of `sound macroeconomic management'

Poland had its rating downgraded by one of the three major credit assessors for the first time as Standard & Poor’s warned that policies of the new government are imperiling the nation’s institutions.

The company cut Poland’s debt grade to BBB+, the third-lowest investment level, in the first rating move for the country since 2007, according to a statement issued on Friday. The country’s outlook is negative, meaning there’s at least a one-in-three chance of another cut over the next 24 months. Fitch Ratings affirmed its A- rating in a separate assessment.

The Law & Justice party has tried to assert its influence over state institutions after winning an unprecedented parliamentary majority in an October election, limiting opposition oversight over secret services and increasing its influence over the constitutional court and a public broadcaster, moves that have sparked street protests in the European Union’s biggest eastern economy. The Polish Finance Ministry said in a statement Friday that the S&P decision is “incomprehensible.”

“The downgrade reflects our view that Poland’s system of institutional checks and balances has been eroded significantly as the independence and effectiveness of key institutions, such as the constitutional court and public broadcasting, is being weakened by various legislative measures initiated since the October 2015 election,” S&P said in its report.

Contradictory Rating

The surprise decision comes two days after the European Commission took a first step to discipline Poland’s new ruling party for exerting greater sway over the state, fueling a debate about whether eastern Europe is slipping back into its authoritarian past.

S&P’s move to lower Poland’s sovereign rating doesn’t reflect “economic and financial analysis,” the Polish Finance Ministry said in its e-mailed statement.

“This decision is contradictory to assessments presented by other rating agencies, the biggest international financial institutions and financial-market participants,” according to the ministry.

Fitch said Friday that it affirmed Poland’s credit rating with a stable outlook, reflecting the country’s “strong macro performance, resilient banking system and governance indicators,” according to the report.

Zloty Tumbles

S&P’s move sent the zloty to its biggest daily drop since 2011 on a closing basis. The Polish currency was trading at 4.4822 versus the euro at 4:48 p.m. in New York, the weakest since January 2012. Among its peers in developing Europe, the zloty is the second-worst performer against the euro after the Russian ruble in the past three months. The country’s 2025 euro-denominated bonds slid the most on record.

“This is a new era in ratings, where ratings agencies are telling us that they increasingly care more about politics and the reform outlook than any positive economic fundamentals that may support a country’s story,” Simon Quijano-Evans, an economist at Commerzbank AG in London. He recommended clients reduce their exposure to Polish Eurobonds to underweight from marketweight.

Campaign Promises

“The change in the rating outlook to negative reflects our view that there is potential for further erosion of the independence, credibility, and effectiveness of key institutions, especially the National Bank of Poland,” S&P said.

S&P no longer believes Poland’s fiscal metrics will improve in line with a previous forecast and expects “some reversals” in the country’s “sound macroeconomic management of the past years, for instance by targeting certain sectors with new taxes.”

Law & Justice campaigned on pledges to boost social spending and spur faster economic expansion. The government has vowed to keep this year’s budget deficit below 3 percent of economic output on expectation that special taxes on banks and retailers will help pay for its program of family benefits.

S&P said the additional spending won’t be fully offset by increases in revenue and predicts the fiscal gap will reach 3.2 percent of economic output this year, calling the assumptions in this year’s budget “too optimistic.”

“We could lower the ratings if we perceived a further weakening in the independence, credibility, and effectiveness of key institutions, most importantly the NBP,” the rating company said in the statement. “In addition, we could lower the ratings if public finances deteriorated beyond our current baseline scenario as the revenue and expenditure balance becomes more negative.”

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