Zloty Drops as Poland's Bid to Silence Court Dispute Backfires

  • Polish currency falls most among emerging-market peers
  • Moody's to review rating next week amid constitutional crisis

Poland’s zloty fell the most in emerging markets and bonds declined after the finance minister confirmed he asked the country’s top court to refrain from making comments about its conflict with the government that could influence a credit review by Moody’s Investors Service.

The zloty weakened 0.3 percent against the euro to 4.4109 as of 5:40 p.m. in Warsaw after Finance Minister Pawel Szalamacha’s letter was published by the court. Stocks extended the biggest two-day drop in a month and yields on 10-year local-currency government bonds rose three basis points to 3.14 percent, the highest since early February.

Investors have been wary of Polish assets since S&P Global Markets unexpectedly downgraded the sovereign’s credit rating in January, citing concern new government policies were eroding the independence of key institutions, including the constitutional court, central bank and public media. Moody’s is due to issue its review on May 13 and Citigroup Inc. expects it will opt to cut Poland’s outlook to negative and leave its A2 investment-grade ranking unchanged.

“The irony in all this is that by trying to get the Tribunal to keep quiet, it’s merely reinforced concerns about institutions – hence the market sell-off today,” said William Jackson, senior emerging markets economist at Capital Economics Ltd in London. “The government appears to have been a bit scarred by the market reaction to the S&P downgrade.”

The zloty fell to a four-year low after S&P cut its rating two steps to BBB+, the third-lowest investment grade, on Jan. 15. The European Union and U.S. have criticized the Law & Justice party, which took power late last year, for passing legislation to consolidate its influence, including rules making it more difficult for the top court to overturn new laws.”

As 10-year bonds dropped on Thursday, the spread over German bunds widened to as much as 295 basis points, the most in more than two years.

Cost Trigger

Finance Minister Pawel Szalamacha confirmed that he sent the letter to the Chief Justice of the Constitutional Tribunal Andrzej Rzeplinski, saying in an e-mailed statement that he was “driven by concern over borrowing costs” and “regretted” the fact that the correspondence was made public in an interview with Rzeczpospolita newspaper on Thursday.

Moody’s said last month that the country faces “heightened political risk as a result of its constitutional crisis” which “may impair Poland’s attractiveness for foreign investors” and is “credit negative.”

The European Parliament said in a non-binding resolution last month that Poland’s democracy is imperiled by the constitutional standoff, while the European Commission, the EU’s executive arm, started a probe in January of the government’s democratic behavior, the first such investigation in the bloc’s history.

“The letter signals the Finance Ministry may know Moody’s decision, which could address political issues,” Peter Attard Montalto, a London-based economist at Nomura International Plc, said in an e-mail.

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