Moody’s Thumbs Down on Upgrade With Tusk Debt Cut: Poland Credit
Moody’s Investors Service and Standard & Poor’s dashed hopes for a quick ratings upgrade for Poland as Prime Minister Donald Tusk rattled investors with a pledge to cancel bonds held by pension funds to cut public debt.
The government’s plans, designed to reduce its debt load by $37 billion, “risk undermining investor confidence” and “do not fundamentally alter our views” on creditworthiness, Jaime Reusche, an analyst at Moody’s in New York, said two days ago. Credit-default swaps, contracts insuring Poland’s debt against non-payment, rose to a two-month high yesterday, while German swaps declined, according to data compiled by Bloomberg.
Yields on five-year Polish notes rose for the fifth day even as Tusk’s plan will eliminate 21 percent of outstanding zloty government bonds. That will boost the share of the securities held by foreign investors to 45 percent, according to calculations based on Finance Ministry data, at a time when speculation over the Federal Reserve’s stimulus tapering plans is increasing market volatility.
“Debt metrics will improve, but the risk increases as a higher share of foreign investors in the bond market is a warning for rating agencies,” Dariusz Lasek, who helps manage 7 billion zloty ($2.1 billion) as head of debt investments at Union Investment TFI SA, said by phone from Warsaw yesterday. “The debt market is going haywire, it can’t find its balance.”
Tusk intends to cancel 121 billion zloty of government bonds held by the 14 privately managed pension funds and ban them from buying such securities, he said two days ago. Yields on five-year notes jumped seven basis points to 4.31 percent at 10:03 a.m. in Warsaw, the highest in 12 months and an increase of 28 basis points since the overhaul was announced on Sept. 4.
The government plan is “essentially an accounting exercise that swaps an explicit liability for a contingent one,” Benjamin Young, an associate at S&P, said in an e-mailed response to Bloomberg questions yesterday.
The cancellation would reduce public debt by 7.4 percent of gross domestic product to an estimated 49.9 percent for 2013, according to Moody’s Reusche. The Czech Republic, rated three grades higher at S&P, two higher at Fitch and one higher at Moody’s, had a debt-to-GDP ratio of 47.8 percent at the end of the first quarter, according to Eurostat data.
Poland is ranked A2 by Moody’s Investors Service and A- at Standard & Poor’s. It has last seen its grade changed six years ago. Fitch Ratings reduced its outlook for the sovereign’s A-rating to stable from positive on Aug. 23.
“We are awaiting some more clarity and information and then we will comment,” Matteo Napolitano, a director at Fitch Ratings, said by e-mail yesterday about Poland’s pension plans.
Banning pension funds from buying government bonds “would make the role of foreign investors even more important in price setting, hence leaving Poland more exposed to global trends,” Brown Brother Harriman & Co. strategists led by Marc Chandler wrote in a note yesterday. “Indeed, the first bond auction this week held after the reforms were announced saw borrowing costs rise sharply for the government.”
Poland sold 5.7 billion zloty of bonds at an auction yesterday, including securities maturing in July 2018 at a yield of 4.22 percent. It last sold five-year paper yielding more than 4 percent in April 2012, Finance Ministry data show.
Polish bonds would have performed better yesterday if not for the rise in yields on core markets, according to Jakub Taborowicz, who helps manage 17 billion zloty in debt at Poland’s largest mutual fund, PZU TFI SA in Warsaw.
“The positives of the reform outweigh the negatives, although the price reaction doesn’t reflect it,” he said by phone yesterday. “The fact that the yield on 10-year bunds breached 2 percent doesn’t help Polish bonds.”
The yields on Poland’s 10-year government bonds rose eight basis points, or 0.08 percentage point, to 4.94 percent today, the highest since Sept. 20. The yields on similar German bonds declined two basis points to 2.02 percent.
The zloty advanced 0.2 percent to 4.2913 against the euro after sliding 1 percent in the previous three days. Quarter-to-date the zloty appreciated 0.8 percent, the third-best performance among the 24 emerging-market currencies tracked by Bloomberg. The extra yield on Poland’s dollar bonds over Treasuries was unchanged at 146, according to indexes compiled by JPMorgan Chase & Co.
Poland’s credit-default swaps, contracts insuring the nation’s debt against non-payment, fell three basis points to 93 from the highest since July 5, while Germany’s was little changed at 28, data compiled by Bloomberg show.
“The resulting reduction in public debt is not a game changer for credit ratings, while posing significant risks to the local bond market in a post-quantitative-easing world,” Bank of America/Merrill Lynch economists Mai Doan, Raffaella Tenconi and Arko Sen wrote in a note yesterday.
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