Photographer: Scott Eells/Bloomberg

S&P Proves Unforgiving Toward Emerging Markets as Poland Gripes

  • Bahrain junked day after prices set on $750 million of bonds
  • Spate of downgrades called `harsh' by Brown Brothers Harriman

Standard & Poor’s is taking the hardest line among ratings firms on emerging markets as a global slowdown and political risk erode creditworthiness.

The firm was the first to downgrade sovereign debt from Saudi Arabia to Poland this year. The unexpected cut of Bahrain’s rating to junk on Feb. 17 -- a day after the Gulf kingdom set prices on $750 million of bonds -- forced it to annul the sale. Bahrain was downgraded along with Kazakhstan, Oman and Brazil.

As the oil crisis ripples through emerging markets, S&P is surprising investors and officials with a spate of downgrades that Brown Brothers Harriman & Co. calls “harsh.” S&P, Moody’s Investors Service and Fitch Ratings were blamed for contributing to the 2008 financial crisis with inflated ratings on bonds financing U.S. mortgages and were forced to answer for them in Congressional hearings.

“S&P is definitely known for being more aggressive and we see that it keeps up with that trend,” Win Thin, head of emerging-market strategy at New York-based Brown Brothers Harriman, said by phone on Friday. “They seem to be more negative on the way down. Out of six downgrades, I agree with three.”

Commodities, once the engine of growth for many emerging economies, are now a drag with crude near a 12-year low sapping dollar earnings. Meantime, the cost charged by bond investors to lend to emerging markets has risen to an almost seven-year high.

“S&P clearly want to get out in front of the curve now,” said Per Hammarlund, the chief emerging-market strategist at SEB SA in Stockholm. The downgrades mark a change from the past, and one that he welcomes. “Previously they waited. Now, it’s a different approach, and a more healthy one at that.”

For its part, S&P said it’s following standard practice and its actions should come as no surprise.

“We continue to apply our very transparent methodology in a consistent and objective way globally,” S&P said Thursday in reply to Bloomberg questions on whether it has changed its ratings approach.

‘Overstepping Role’

Poland’s Finance Minister Pawel Szalamacha disagrees. He said the downgrade of his government’s rating last month expanded S&P’s remit beyond that of determining default odds.

“They are overstepping the proper role of the credit rating agency, although they say it is their methodology,” Szalamacha said in an interview in London on Friday.

In its first-ever rating cut for Poland, S&P lowered the sovereign one level to BBB+ with a negative outlook last month, citing concern the new government’s push to take control of key institutions risked their independence. The move from a positive outlook was also a first and sent the zloty tumbling to a four-year low. Poland’s currency has since then recovered those losses and extended gains today to 1.4 percent versus the euro in February, the third-best performance of emerging-market peers.

Even in the U.S., S&P’s downgrade in 2011 didn’t inflict lasting damage. Two years after the U.S. lost its AAA rating, investors rejected the notion that the U.S. was less creditworthy than its higher-rated peers. The premium investors demand to hold Bahrain’s $800 million of 7 percent notes due 2026 has dropped 10 basis points since the downgrade to 541 on Monday.

Deeper Junk

S&P’s cuts last week sent Brazil’s rating deeper into junk to BB, two levels below that of the Moody’s. For Saudi Arabia, S&P’s assessment is three steps less than the one from Moody’s. And Bahrain, seen as junk by S&P, has an investment-grade Baa3 from Moody’s.

The firm also reduced the outlook of Colombia’s BBB rating, one of only two governments in Latin America with investment grades, to negative from stable.

“It seems S&P is again being overly harsh by suggesting a move to BBB- is now possible,” Brown Brothers analysts said in a Feb. 18 note to clients. “We were very surprised by this move, and disagree with it.”

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