Zloty Tumbles Most Since 2011 as Polish Bonds Slide on S&P Cut

  • Commerzbank cuts the nation's Eurobonds to underweight
  • Polish Eurobonds slide most on record after S&P cut to BBB+

The zloty headed for the biggest decline since August 2011 after Standard & Poor’s downgraded Poland’s credit rating for the first time in response to policies by the new government.

The currency weakened 2.2 percent to 4.4930 by 6:41 p.m. in Warsaw after S&P cut Poland’s debt grade to BBB+, the third-lowest investment level, in the first rating move for the country since 2007. Euro-denominated bonds slid the most on record. Commerzbank AG reduced the nation’s international bonds to the equivalent of sell in response to the rating move.

Currency weakens most since 2011 after S&P cuts rating
Currency weakens most since 2011 after S&P cuts rating

"A downgrade is a bit more aggressive than had been expected by the markets," said William Jackson, a senior emerging-market economist at Capital Economics Ltd., who reduced his 2016 zloty forecast this week to 4.6 per euro. "Polish assets are likely to perform poorly over the course of this year. Poland had been seen as a bright spot in emerging markets, this puts a dark cloud over that."

Markets have been punishing Polish assets, long regarded as a haven amid turbulence in countries such as Russia and Ukraine, since the election of the opposition Law & Justice party in October. Since taking power the following month, the new government has pushed to overhaul the constitutional court, the anti-corruption agency and public media, named a ruling-party lawmaker to lead the nation’s largest refiner and named new central bank policy makers.

S&P was the first of three rating companies scheduled to review Poland on Friday.

‘New Era’

The new authorities have "initiated various legislative measures that we consider weaken the independence and effectiveness of key institutions,” S&P said in its decision on Friday, which included a change in outlook to negative.

The zloty has weakened 5.1 percent against the euro this year, the fifth-biggest drop among 24 emerging-market currencies. Local markets were shut before the S&P announcement.

Euro-denominated securities dropped on Friday, pushing the yield on notes due in September 2025 up 13 basis points to 1.6 percent.

The European Commission took a first step this week to discipline Poland’s new ruling party for seizing heightened control over the state, fueling a debate about whether eastern Europe is slipping back into its authoritarian past. Law & Justice’s sin, in the eyes of mostly western critics, was to pass legislation undercutting the independence of the high court and public broadcaster after winning an absolute majority, a rarity in European parliamentary systems.

"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, chief strategist in London at Commerzbank, said in an e-mailed note. He reduced Poland’s Eurobonds to underweight from market weight.

"The downgrade is the reason why we have been more cautious on Polish credit and local-currency bonds versus central and eastern European peers that are benefiting from safe-haven flows," Quijano-Evans said.

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